All Harvard and Yale would have to do to increase their endowment by 2 billion a year, would be to dollar average, putting all their money into index funds or Spiders on a once a month for 12 month basis over the next years, and eliminate 99% of their fund managers.
Russ Sears writes:
One of the hardest things to do is to get someone to see they made a mistake because they did not have a broad enough vision or face all the the important facts, when they did have a well thought out plan but based on a narrow approach.
Kahneman's "what you see is all there is" needs to be expanded, to include the stubbornness that comes with it. This is the real danger of modeling. A good scientific model can help you overcome your emotional biases, but models are not perfect. Admitting that the models are not reality and letting yourself adapt when they are not accurate representations of what is happening is critical. This is why I believe in "counting" except when there is a liquidity crisis.
Basing performance on a Sharpe ratio has several problems / efficient frontier has several problems that it is blind to. First, it does not consider liquidity and accounting risk. Second it is exposed to modeling error on hard to model assets. And third it is exposed to execution risk or timing risk due to over-managing "exotic" assets.
A nice accounting scheme, can make certain assets almost guaranteed high sharpe ratios for the short term. Ask Gordon about how this worked with Federal Home Bank Loans and insurance companies. But same can be said about most real estate and other illiquid assets.
Second, the models assume correlations are constant and that there is no auto-correlation within the time periods. But if any asset is exposed to runs on the them, such as home ownership, then these are not valid assumptions. Structured assets are highly exposed to this risk. But so are banks and cash value insurance companies.
Finally, those that are blind to WYSIATI risk are those most susceptible to the news. Buying high because they hear how great others are doing. And then sell at the bottom because they hear how the others made a mistake. Further, most organizations that are void of valid self examination of leadership have many second tier leaders looking to say "I told you so" for any investment outside the norm, whatever that norm may be.
I have sat through many efficient frontier presentations where the conclusion was always the same; invest more in illiquid assets, invest more in assets that are impossible to model right, and invest more in exotic assets which I knew management did not have the guts to buy low and sell high.
June 8, 2014 | 1 Comment
What do you call it when one of your friends pretends that he's criticizing you while really praising and exonerating you. It's not "your own man". It's a variant of "the perfect lie". You pretend you're blaming your friend while really praising him. "We called silver top at 950 but it really went to 10 before cratering so we were wrong." As Harry Browne said, "Well, if this guy considers himself wrong when he misses by just 5%, he must be incredibly accurate. I better sign up now."
Gary Rogan writes:
I have seen Woodward do it a number of times. Some may remember "the threat" to Woodward from the White House a little over a year ago after "Inarguably, Woodward has had greater access to the White House than any other journalist in town."
Kathleen Parker: The Obama White House 'threat' to Bob Woodward matters
Now Woodward is somehow sure (from the Newsmax article) that "Obama didn't intend to do something dumb… He just wanted to do the humanitarian thing and get Bergdahl released, "and then they failed to manage it."
I mean what else can it be? In the olden day the King never knew all the bad things that happened to the simple people, he was always deceived. But he always meant well.
And those who watched last Sunday's Fox's morning program saw how Woodward gently (well OK, snidely) made fun of a conservative talk show host because she just can't forget about Benghazi. What's a man to do if he has to maintain access? Or maybe this is about more than maintaining access. There is no reason to anthropomorphize these animals.
Russ Sears writes:
In track it's called "missing his seeded time". The only thing I have personally experienced that comes close to the lies traders to themselves and others is runners and their training and Personal Record. If you don't believe me talk to some fat person who has been to jogging for over a year and hasn't lost any visible weight, how their training been going.
A PR in most big races that have entry times now must be validated. Often in a race like Boston, the NCAA Track Championships or the Olympic trials, the times are so stringent that the racer often peaks before the race and then race day conditions are never as perfect as they were on PR day.
But in track, in minor races, coaches must give a "seed time" for the race officials to pick the lane and the heat that often are unverified. A seed time is suppose to be from a recent race, but rarely are they verified. The good coach will whittle his best runners times down to give him the best lane/heat. Then of course after his race, when his times are higher than seeded, "it wasn't his day".
Its unspoken but understood if he had the best time on the team, why he missed his seeded time.
George Zachar writes:
This seems like a first cousin of the "humblebrag", which is when you, usually consciously, try to get away with bragging about yourself by couching it in a phony show of humility, like "your inflatable inner-tube is way cooler than my 80-foot yacht. You get to be so much closer to the water and to nature. I envy you, I really do."
Perhaps it should be called "humblepraise".
Running has historically suffered due to a couple reasons that makes anecdotal evidence pose as empirical science.
First running benefits stem largely from its first order damage it does to your body. It is easy to see the cause and effect of first order damage. It was only in 1980 that the women were allowed to run the marathon in the Olympics. It was thought running distance would make women infertile because it simply was too stressful.
When I started running in the early 80's the now thoroughly PC magazine Runners Times was then a underground magazine. It had an article titled something like "How to Avoid the 3 "D"s, Dogs, Doors and Doctors" sub-headed "so they will not stop you from running." ("Doors" were car doors opened while they drove by a runner on the roads shoulder)
It is much more difficult to see the second order effect, the enhancement of the bodies genuinely incredible ability to heal itself.
However, it has recently been shown that 30 minutes of aerobic exercise creates new brain cells. Aerobic exercise is the only known way an adult can create new brain cells. Hence science is beginning to understand the mechanisms for the neuroplasticity running gives a person. Often this neuroplasticity is more effective than the best drugs and counseling. Depending on your age aerobic exercise deceases your chance of Alzheimers up to 50%. Likewise your chances Parkinson is decreased only by moderate to high aerobic activity.
As for running "too much". Yes there is a limit where doing too much, no matter how healthy and young you are, were the damage simply is too great and the enhancement in the bodies healing mechanisms are overwhelmed. However, for most people, it simply is they do too much too soon. They never get to the maximum benefit, because they rush the process. But also, often this over dose is the result of "needing" to exercise to heal your mind. Your psyche thinks if some helps, more is better. During psychologically stressful times, I have had to be careful not to over do my running. For example depressed people often can find great relief from fairly high mileage, say 7 to 10 hours of running per week. But often after getting that relief they try doing double that, which is too much.
Secondly, if there is already something wrong with you, the stress of running will bring it out. Have a lingering knee injury from playing basketball? A sore back from golf, or football? Running will find that weak spot. But also starting the flu, mono, first signs of cancer, run and often you will have an early warning sign. Rather, than begin the initial cause, running can make it clear something is wrong. Anecdotally, running is the fall guy… rather than the real culprit. It is only through large statistical samples does this become clear.
Finally, for the specific cases at hand and for why pull-ups every day may help more than taking a day off, I would suggest that pull-ups are great for back and arm flexibility. A complete day off could stiffen one up and I suggest rather than no pull-ups one try a hard easy day cycle. On easy days go much slower, resting between and fewer reps. And on hard days go faster. Finally rather than focus on total done at once try doing "sets" of say 6. Or say a Ladder, 2, 4, 6, 8, 6, 4, 2.
The four minute mile was broke by doing intervals: repeat quarters, with rest in between. If the training purpose is thought to maximize your ability to heal, rather than simply run faster, get larger muscles or lift more, then letting your body learn to recuperate quickly makes much more sense.
Last but not least, what does seem to compound in a marathon, is not the time but oxygen debt….that's why its called "debt". Get in debt too quickly in a marathon an you find that the course is the longest 26.2 miles (42.2k) in the world. Larry is right the best times are negative splits. Because they did not tax themselves too much in the beginning. It is often said a person can complete a marathon, if they can run a half marathon. They do this by walking quite often the first few miles and run with little or no walking near the end.
Both these ideas, I believe, have some very direct implications to a trader. For example, stress and relax for brief periods, some "tough" days, week or months to clear the mind. Even short term traders need to have long term goals that supersede the short term payoffs.
Forgive me if I haven't augmented the dinner party lately as one was at his 50th reunion at Harvard where I heard a great Boston Pops concert, did some bird watching at the very elegant and peaceful Mt. Auburn Cemetery, and found many of my classmates who seemed just like ordinary boys in '64 were now quite eminent and personable. About 1,000 out of 1,200 living out of 1,500 entrants were there. The joke was that if Bin Laden had been a Harvard student, the fund raising apparatus would have had his whereabout so they could solicit him. You will be hearing from me shortly.
Rocky Humbert writes:
According to the Social Security administration, out of an all-male '64 class size of 1500 entrants, only about 1065 should still be alive.
Perhaps going to Harvard is the secret to longevity?
Russ Sears writes:
There is considerable self selection in going to college. Higher education could be thought of as an annuity ceasing upon death. SS death rates are higher than most actuarial tables, because life insurance is generally underwritten. But annuity tables have the lowest death rates due to the self selection. Incidentally the more options you have in a payout of say a pension plan or even SS, the more likely the annuitant will game the options. Where politicians often start with equivalent tables.
April 16, 2014 | Leave a Comment
Run for my Money, run
towards my fears,
Run when I’m Hungry,
run from my tears.
Run with me Honey, run
with the years.
Run for my Living, run
towards the cheers.
Run On! Run Strong!
Just for the Day.
Just for the Way.
Run On! Run Strong!
For who knows some day
the Miles may just take you away.
Run for the Feeling,
run towards the pain,
Run when I’m Dreaming,
run from my cane,
Run with the Loving,
run with the sane.
Run for the Moving,
run to victory lane.
Run On! Run Strong!
Just for the Day.
Just for the Way.
Run On! Run Strong!
For who knows some day
the Miles may just take you away.
April 8, 2014 | 1 Comment
1) First, some thoughts on the question "what would happen if everyone lived off capital?"
If people saved, rather than spent, every dollar they earned, it would initially slow down the velocity of money. Likewise if no one ever spent savings, it would initially slow down the velocity of money. Rather than maximizing immediate consumption, people would be savers first, then very frugal consumers.
However, in both these cases the slack would be picked up in either the business sector, or the government sector, since there is now have an over supply of savers looking to invest capital. This would, of course, lower the risk, as the companies would not have to jump too high a hurdle to make interest payments. When do you think government would likewise only spend capital?
The recent financial crisis could be thought of as the opposite case where everyone thought they could leverage and overspent. This increased the risk as savers willing to lend disappeared. The money given to the flexions' banks to save them, could be thought of as printed money put in a lock box called deleveraging. Hence an increase in the quantity but a slowing of velocity of money and a risk of deflation.
2) Now for some strategies for preserving capital. The idea is to be a saver first, a consumer second.
Lets assume we invested $1,000,000 in Vanguard's index fund in April 1987. And any week we ended up with more than $1,000,000.00 we withdrew the excess. Below I list the 52 week amounts withdrawn (assuming 364 day years, 364 = 7*52). While the average $138,000 seems generous, about top 5% of earners, it would still give you many years in a row of $0 withdrawn in the 2000's. But if you think these booms and bust are systematic, then a better strategy would be to only withdraw in any one year a set amount, and save the rest for those lean $0 years. The next 2 columns shows how much you would have withdrawn if that set amount was $125000 annually. The withdrawals come from from $1 million invested in stocks excess earned, first, and then, if needed, from the amount stuffed under the mattress (not literally, of course, but previously set aside as neither consumed nor invested in stocks) . The amount invested in stock is kept at $1 million, the excess not spent in any year is mattress padding for future years.
You can see that during the bounteous years of the 1990s, you could have set aside over $1 million without compounding to cushion those upcoming lean years.
(Note: fiscal years ending in April)
Rocky Humbert writes:
Mr. Sears' approach towards capital withdrawals is nominal, not real. So in an environment of 10% inflation and a risk free rate of 10%, he would be shrinking the real value of his corpus as he withdrew 10% on average. Conversely, in a deflationary environment, with rates at zero, he would not be consuming at all even though the corpus of his portfolio would be growing in real terms. The reality is that inflation has been averaging between 2 and 3% for the last decades and that destroys the corpus over a lifetime.
This wealth illusion associated with inflation/money printing is prevalent among both retirees and working folks. It is an insidious behavioral bias and I believe affects both consumption and economic activity. The bias is one reason that deflation is a drag on medium term growth.
Ralph Vince adds:
I believe inevitably governments, a century or several hence, will live off of their own capital, part of a social-evolutionary process.
A structured dismantling of future liabilities (undoing the mega-Ponzi Social Security in the US, for example, in an orderly manner through generational taper with newcomers to the job market putting 100% in self-directed, those leaving the job market, 0% self-directed) and would other future liabilities to a sustainable level, and some time later, to a level of easy sustainability would allow an ultimate sinking fund of future government liabilities, eventually reaching a level of self-sustainability.
At which point, one would HOPE taxes would end, unless the Catholic Church model is employed.
Stefan Jovanovich writes:
Everyone does live off of investment (I think this is what Russ means by "capital"). The one correlation that seems dismally robust is that, in spite of all efforts to "distribute" (sic) wealth, only the ratio of private investment to people working determines how high someone's pay can go. If there is low "capital" investment, people make very little; if there is high "capital" investment, they make much more. People instinctively know this; it is the reason we all have our eyes drawn to to displays of physical grandeur and, in the days of the gold standard, bank lobbies always had marble. But, since we live in the age of alchemy (the nominal wealth illusion the R-Man notes), "income" becomes more important than savings.
Ed Stewart writes:
Stefan doesn't it matter how savings are deployed. Savings productively deployed in a way that increases output of goods and services increases total wealth (and if such capital is up per head, wages) but not all savings are equal in this regards. Savings deployed to fund a make-work project via government debt represents consumption. I question if in general, savings used to help another party pull forward consumption on net represents consumption and not savings, just redistributing wealth from shortsighted to farsighted — if that makes sense (??).
Russ Sears writes:
Once again my e-mail's brevity and my poor writing causes some confusion. The "mattress" strategy was meant to be humorous, not literal. Implying you have many options as to how you use the "savings" to hedge inflation. This strategy was meant to illustrate how to take equity risk while still withdrawing a decent amount for consumption. $125000 is a decent amount in today's dollars to live off, but in 1988's dollars that was very high living, perhaps near top 1%. In the example, the amount withdrawn could easily be slowly increased for inflation, with interest earned on the savings or less savings. The bigger problem I have with my own example is what do you do if you retire/need money at the start of long term $0 return to $1,000,000 capital amount. But let us go over some inflation options:
1. Put savings back into equities…I believe, (only my opinion), this may be a good option if money keeps being put into the system due to low or negative inflation and hence likely low interest rates as we currently see. But, this also leaves you more open to risk of inflation killing the equity markets or long term bear markets in general. However, looking back long term equities returns should beat inflation if next 100 years is like last 100 years.
2. Put saved money into a long term bond fund. This could handle mild inflation, as long as it stays mild.
3. Put money initially into short term fund then as inflation gets "high" switch over to long term bond fund as inflation kicks up. But this leads to when is inflation "high" (10% seems to be Rocky's boggy). Perhaps the answer is when it starts killing equities returns because the market is worried about it. Then if you think this is the case start putting "more" of the savings into long term funds. You'll have to decide what "more" speed is and if inflation is "the cause" for poor equity returns.
4. A combination strategy.
How to invest for inflation is a tough subject which such a simple "living off capital" strategy was not meant to answer. I hope the above shows sufficiently that a disciple approach to withdrawals. even if adjust for some inflation is better than simply going with the wealth effect and spending as earned from equities. But in the end you are going to have to decide for yourself, what you think inflation will do and when it will do it. And then execute it. But at least a disciplined approach to withdrawals give you much more flexibility and with it a chance to meet this challenge.
Finally the reason "capital" was chosen instead of "investment" was to signify an investment that is somewhat dependent on a stable "monetary" base for entry and exit. As opposed to a more direct investment in human capital or even property which may out last a government and may more likely be inverse related to inflation.
My Mother was an identical twin. Twins often one right and one left handed, and have other differences in thinking. But also one also gets more nutrients in the womb and one is more healthy than the other. I could always identify my Mom in her childhood pictures as the frailer looking one. She died of kidney cancer at 57 and my Aunt is very healthy at 73.
On a lighter note, while Billy may be right that : "Only the good die young". The contrapositive to this, I remind those that dismiss exercise, is: "Only those that died old lived badly". It is not all about the age.
Aerobic exercise is the one proven way to grow brain cells. The new cells can strengthen the neuroplasticity of the brain. This helps the "old" keep learning new ways to think, keeps the brain forever 21.
Carder Dimitroff writes:
I just returned from my nth trip to visit and help my dad. He is living in a gold-plated senior community with lots of amenities and support staff. Previously, my mother-in-law lived in a similar community.
My stays with my dad are usually 3 or 4 days. He does not want to rush and he has a long list of "must-do's." Altogether, I've spent about 30 or 40 days living on the campus.
I know other list members have had similar experiences. Without personally witnessing the daily life of a senior, nobody could possibly understand the hopes, fears, challenges and life of the nation's elderly.
Let me share some observations. Others may want to comment, so feel free to offer your thoughts.
1. Diet: Most, like my dad are thin. Few are overweight. I saw no one critically obese. While plenty of great food is offered, I suspect many are skipping meals.
2. Exercise: The facility offers a fully staffed and modern gym. They also have outdoor facilities. They are rarely used. Most seniors need core and upper body strength to transfer. They don't see new exercise regimens as an opportunity to restore or maintain their health. Nobody runs.
3. Sunshine: Spend a few hours a week outside and one or two pills can be eliminated.
4. Medicare: Leave it alone. Yes, these are all wealthy people. Most are self-made. Nevertheless, they all believe Medicare is something they earned.
5. Medical care: Left to their own devices, they are not big consumers of medical care. Their attitude is: "If it ain't broke don't fix it, if it is broke, don't tell anyone." Their biggest fear is the facility's medical center (a separate skilled nursing facility). Most will hide medical issues fearing they will be forced into the [gold-plated] medical center.
6. The end: While good health is a requirement for admissions, many realize this is it. They know this is their last stop. It is a sobering thought (even for me). They also know they are no longer significant contributors to society, particularly these residents who are largely hidden from public view.
This is our fifth family member to take this trip. I've concluded the best option is to eat nutritious foods, exercise and get out. Like James Fixx, I want to live well until the end.
Sam Marx writes:
I am up there in age and would easily fit into one of these seniors communities. I trade stocks and especially options. Financially I'm very succesful. I feel that trading, especially options, has kept me mentally alert and healthy.
I pay a lot in taxes, it seems more every year, so I guess I would be judged still as contributing to society, whatever that means.
I live in a gated community in Florida, and the younger residents are always asking me for financial and trading advice.
A colleague who taught at college with me never trading and seems to be mentally regressing. The "youngsters" don't care for his opinions or to discuss anything with him.
For those of you that trade, don't fear old age. Active trading contributes to mental health and alertness.
Sports are selling a dream to the kids of one day making it.
People watch sports because we mirror the players' motions in our heads. People imagine they did what the stars did, despite the impossibility of it. But you throw drugs into it and most will reject the idea that they mirror substance abuse. You put drugs into it and it is like finding out the secret ingredient to your favorite restaurant is small dose of poison or that their bakery is rat infested and did not pass the health inspection. It has to be dealt with harshly once exposed, or it is like a player shaving points for the bookies, it can and will destroy the brand.
Body building was still a sport when Arnold did it because it was not known they all took roids. Now it is like pro wrestling, a freak show. Nobody want their kids to become a bodybuilder, except bodybuilders. Finally, it is cheating, nothing to be admired, anymore than messing with accounting to get your bonus while ruining the company. If you had lost money to a drug cheat, it is easier to comprehend. For runners EPO is like playing Russian roulette. Your heart can literally explode, as you dehydrate. Now this is like World com executive cheating and knowing that it could destroy them in the process. Or a Ponzi scheme, wanting the good life at least while it last, despite the misallocation and destruction of wealth that goes well beyond their millions.
Craig Mee writes:
That's true, Russell, excellent points. What I'm thinking is that sports may in fact drive advances in clean drug and herb technology that benefits the human body more than it wrecks it, or advances other sciences where they need to push limits like space travel. I, too, worry about the children. I wonder what will happen to trying to improve your performance and competition–the very nature of sports. But hopefully what started out a bit dark may lead to good things.
Chris Cooper writes:
There already is plenty of overlap between drugs that make you healthier (when taken in moderate doses) and drugs that improve performance. Look at the list of drugs taken by Lance Armstrong, for example: testosterone, hGH, EPO. All of them make you healthier when used moderately. But elite athletes have the motivation to increase dosages to potentially unsafe levels, which is where concerns about safety spring from. I have no problem with the use of PEDs, but I abhor the lying and cheating that normally accompanies it.
If you are the trader getting squeezed and know it then you don't have to liquidate the threatened positions. What you do is rank the most liquid correlated positions and especially the liquid OTM options of correlated and liquid items and let the predator activity enrich you.
I'd like to see your answer on this plan about cutting the slippage and hopefully doing it near the point where they think they've got you and you can exercise options to hit back.
It's a military type tactic that suckers the predators into a trap. If one can slice and dice orders anonymously without a bank holding all the cards, one might make it work.
The trader getting squeezed has perfect information on the vulnerable positions and goes to the electronic and somewhat anonymous options markets to buy cheap OTM volatility explosion options in all liquid and related assets to soften the blow. Let's see the predators game the algo slicing and dicing of hedges while inflicting what they think is pain. They should pay off the victim of such a squeeze 2:1 at a minimum.
Victor Niederhoffer writes:
What do you people think of this? For reasons of loathing, and avoidance of squeezes, I have avoided any study or consideration of options for many years.
Russ Sears writes:
It seems much of the hedge cost is tied up in matching an exact date and risk of sudden jumps across the strike as that date approaches. From my experience hedging variety of equity indexed annuities (S&P indexed call options embedded in an deferred annuity). I believe the secret to not getting squeezed is to manage the gamma position under "normal" conditions by writing shorter dated options an buying slightly longer time positions. And manage the delta exposure by the different strikes. If you are long gamma you maybe shorter delta than you want after a big drop, this can be carefully reversed (sell long dated, buy shorter options) as volatility spikes.
While not endorsing the derivative expert's new book "antifragiles" (he is too long winded), I would recommend only reading the prologue. It is like exercising, if you practice hard the first order effect is to tear down. The second order is to recover. So you go long the healing process under healthy times to prepare for age and diseases. People dread the first order pain too much so they don't exercise and buy out of the money expensive puts.
What the expert misses is not only do you stress yourself to increase your ability to recover, you indulge your self after the stress, sleep, food and ice baths etc. if inflammation is too much. In the book he says he is on a fast of some kind almost always. But he also lifts weights walks and exercises. This is not healthy. It is as much about the recovery as it is accepting some first order pain.
It is true Enron's management was engaged in a series of bad decisions. It is also true Enron offered major contributions to the energy industry. Their biggest contribution was to introduce power markets to the electric utility industry.
Because of Enron, control of the nation's transmission lines was wrestled away from utility engineers and put into the hands of traders and bankers. Physical transactions were replaced with financial transactions. Free options to use assets were monetized and priced in open markets.
One example is firm transmission rights (FTRs). Before Enron, owners gave away rights to use transmission lines to a trusted few. Now, FTRs are auctioned in open markets, where users bid for the right to use utility assets.
Because of Enron, Regional Transmission Organizations (RTO's) gained significance. RTOs are what many believe is the "nation's grid." The truth is North America has many unconnected grids, ten of which are open markets in the form of RTOs (most of the nation's population centers are located in one of those RTOs). Every day, RTOs conduct a series of open auctions for energy. They also conduct other auctions for capacity, FTRs and related products and services.
Enron helped transform a highly regulated government-controlled industry into a loosely regulated market-based industry. Enron went bankrupt before the transformation was complete. Initially, only the Northeastern states and California jumped into market-based power. Later Midwestern states, Texas and some Southwestern states joined in. But to this day, many Southern states shun power markets, preferring instead a government-controlled regulatory scheme.
It is true that Enron tried to corner the very market they created. It is also true that the financial techniques they introduced were new in the energy industry, they were borrowed from Wall Street, they were transformative, they were sometimes unfair and most were legal at the time.
Today, RTO's operate under Federal Energy Regulatory Commission rules. Those rules include valuable lessons learned from Enron and other actors. They continue to evolve.
On balance, Enron was a positive force for free markets. They were also a negative force for fair markets.
Russ Sears writes:
Enron is a good example of what can happen when a company/species goes from a survival of the first strategy into a survival of the fittest as their niche draws competition and does not survive the process. Normally, growth and high profit margins are a sign of strength, but the temptation as the niche gets crowded is to eat the young to support the current generation of leaders so they can grow and have the high profits they were brought up to believe was their birthright. A similar thing happened in the mortgage backed markets.
These are the times that test collaboration and integrity. It is easy to be honest in passing out the pot when it keeps growing fast and furious. I believe Apple may be a case where it survives through a good collaborative environment within. Time will tell. Given Jobs' reputation of being a dictator and his temper, would this have been the case if he was still running things once continued growth became limited?
David Lillienfeld comments:
The issue with Jobs isn't what he would have done. It's whether the management team he left leads the company to continued prosperity. It isn't yet clear that they are so doing, but I'll give them another year to show one way or another.
Managements have two responsibilities–place the right people in their jobs and to provide for an orderly succession that allows the company to continue and hopefully better its lot. (Bettering its lot means ultimately bettering the lot of its shareholders.)
The book on Jobs as CEO isn't yet concluded. Many suggest that he was the greatest CEO of all time. I'm not ready to subscribe to that notion–not until his successors provide some demonstration that the company is not adversely impacted by his departure–no man being indispensable (that great Churchill comment about the cemeteries of Europe being filled with supposedly indispensable men). From my limited perspective, I think the title of the greatest CEO remains a tie between Alfred P. Sloan and John D. Rockefeller. One can argue about what they did, but its hard to argue with the results–both during their tenure and afterwards. J. P. Morgan, too. I suppose one could put George Washington in that league too, but I'll defer to others on this list who can speak to that idea–pro or con–better than I can.
Jobs was an SOB, but the man performed. So was Bob "get rid of the olives" Crandall. And Henry Frick. They all performed, they were all considered magnificent CEOs. The latter two hardly qualify as among the greatest CEOs, and the book is still out on the former.
I have been considering whether there is any evidence that socially responsible businesses are better investments than profit maximizing ones. Most of the research points out that it is hard to define profit maximization because short term and long term maximum paths might differ. The concept of risk and return is also relevant with higher return often decreasing the chances of surviving. The duty of a company and its directors to its shareholders, and their incentive to do better for themselves and their shareholders by increasing earnings also plays a part. The concept of dead weight cost is also relevant which is minimized when marginal cost equals marginal revenue and the pricing is such that the demand curve intersects the supply curve at the profit maximizing price. I found this article on going for fourth downs refreshing and provocative in this area.
Rocky Humbert writes:
I think this is an important subject to consider and the current academic literature does a comparatively poor job. For starters, there is no satisfactory definition nor rubrics of "socially responsible businesses." The monikers of "sustainability" and "green" and "sensitive to communities" are difficult to quantify to say the least. And frustrating to understand in many cases. A chemical plant that dumps its toxic waste into the backyard (while poisoning its workers and neighbors) is?? clearly maximizing short term profits at the expense of long term profits. And it's clearly socially irresponsible. And it will eventually fail. In contrast, my office landlord just installed infrared soap and hand towel dispensers in the bathrooms (presumably to be green), but will they have a good ROE on this? I have no idea. Will they attract new tenants because this is a "green" building? If the rent is the same, I suspect yes because some # of customers get incremental utility from transacting with socially responsible businesses. In contrast, no one (reasonably) gets incremental utility from transacting with socially irresponsible businesses.
The "duty of a company and its directors to its shareholders" is a decidedly American concept. The reality is that torts and taxes and regulation mean that the actual implementation of this duty may in fact include social responsibility. Things have changed over the past 100 years (for better or for worse). So — the answer to the chair's question must be: if the cost of being socially responsible is small, then socially responsible businesses MUST BE better investments. If the cost of being socially responsible is large, then it's less clear — and there is the free-rider problem.
Rishi Singh writes:
I had the benefit of hearing the current owners of the Empire State building give a talk on going green and increasing revenue a few years back. Their synopsis was that going green for the sake of going green was too expensive for the marginal benefit (e.g. solar panels). Instead, by gutting office space, adding insulation, different windows, and light sensors to turn off lights, they improved the quality of the offices and significantly reduced utility costs at a reasonable cost. By adding these features they could charge higher rent while also improving their green footprint and returning to profitability. An example of market forces awarding the cheapest implementation of reduced energy usage.
Susan Niederhoffer writes:
1. His point about short term vs. long term is very important … because long term you see/pay for your short term decisions. Conscious Capitalism companies are long term focused. We have used as proxy for good companies, 100 best companies to work for, or some other third party list.
2. Your heading reveals a trade-off mentality, that it's either or. That's not what we've found. It's possible to keep looking for solutions that make ALL stakeholders better off (and most CC companies include the earth as a stakeholder to avoid those nasty externalities). Even if it costs in the short run, doing the right thing will pay off over time. Patagonia is a good example.
3. CSR is often the crony capitalist trying to tack on a beneficial marketing strategy to get on the green bandwagon (his landlord). You have to dig deeper to sort out which companies really mean it.
4. Transparency is getting harder to avoid. Companies that delay finding out about the negative impact they have in their supply chains and fixing them will pay when their customers discover and put it on twitter. Brand loyalty is hard to buy.
5. You will have fun debating these with John at Junto. Keep up the research…but better read the book too.
Russ Sears comments:
The problem also is there are many "socially responsible" businesses that are not to be believed. The customer wants to do business with a business that is on the loyal side of the prisoners dilemma. It signals that they value repeat business, and this one transaction will not be be maximized at the customer's expense. In other words, a properly designed social response shows that the business considers itself to be in an infinite set of transactions. It will take less now so that the great great grand kids can make up for the small cut they give back to society. Like Zacheus the tax collector, if they miscalculated and took more than their share, they will return it 4 X what they took.
The problem however, is that often a social responsible business is really doing a slay of hands. Like Capone gifts to the Opera, or LiveStrong gift to healthy living.
Also sincerity is terrible difficult to measure, but it's something many individuals think they are better at than they are. Like ants, they are to be trusted because they give off the scent that they are from the same "tribe".
In reading Scorecasting, well reviewed and recommended by the chair, I came across a point that hits home when looking for statistical causal relationships. When x variable appears to be related to y variable, it is very possible that an undiscovered variable z has a much larger effect, perhaps on both variables. There are examples of this in the book, mostly thoroughly explained in the home field advantage. This is empirically shown to be true across, time, cultures and sports, running at an advantage of 55% to 70% in favor of the home team. Controlling for other things, crowd size does correlate very highly with the home team advantage. But changes is crowd size are shown to have no effect on players performance. Rather crowd size influences officials, but it is secondary affect. The primary affect is officials themselves who have a in bias (most likely unknown to themselves prior to this book) to favor home teams regardless of the fans. Crowd size amplifies or dims this already existing bias. Had the authors not researched deeper this point would have been lost.
Pitt T. Maner III writes:
It is interesting that there are sites that keep statistics on the refs now too.
The held ball call near the end of the Louisville-Wichita St. Final 4 game by Karl Hess appeared particularly bad but you wonder what the factors and influences are that might have led to it. The game finish would have been much more enjoyable if the Shockers had had at least one last attempt at a 3-pointer to tie the game.
Was it the nearby presence of the Louisville coach Rick Pitino? An ego issue where the ref felt the need to decide the contest? Crowd influence? TV audience thoughts? Subconscious need to end the game and prevent possibility of overtime (desire to get off the court,)? Something a player said (need to payback for perceived questioning of previous call)? A whistle blown by mistake in a hurry with no means to take back (I never make a bad call in an important contest). Lots of possibilities.
Russ Sears writes:
When watching a game, I have often thought that the bias in the ref could be spotted by whether or not they avenge a bad or close call on one side by giving the next close call to the opposing team. After a moment of reflection, the ref probably realizes he blew the whistle too soon or did not blow the whistle when he should have. However, it appears to me that the avenged even handed blown calls are often one sided. Yet when watching a game, my own biases would prevent me from "counting" this fair.
Perhaps the broadcasters in a national game could be counted on, but it appears to me they have a vested interest to give the losing team something to complain about. If I recall correctly, the tie-up was initially called a great defensive play by Louisville, but then changed to blown call.
April 9, 2013 | 4 Comments
I admitted I was powerless over my affliction to taking small profits.
I made a decision to turn myself over to the care of those who affably might help me as God has helped others.
I made a searching inventory of all the losses I have taken.
I admitted to other human beings especially the spec list the nature of my wrongs.
I am ready and willing, but perhaps not able, to remove these defects.
I humbly ask all my supporters and friends to help me remove them.
I have enumerated the many millions that I have lost and beg forgiveness from those I could have helped had I not had this affliction. My family would be a very wealthy family and would not have to worry about such things as homes and educating their kids had I not succumbed.
I promise that I will make amends to them except when doing so might lead me closer to the grave and a nondescript and economical old age home.
I will continue to take an inventory of my lost profits and exacerbated losses, and when I transgress I will admit it. Readily.
When I jog, and have a peaceful moment, I will meditate on my past transgressions.
I will share the awakening of my profits, if any, with my colleagues so that others afflicted with this ailment can practice the principles necessary to correct.
And I will count. If this affliction manifests itself in day of week effects, than when the two day move is down seriously and the one day move is up, there should be a rise the next periods. I find of the 152 most similar events in the new millennium, the average decline the next days is -0.05 %. When the two day move is up seriously but the one day move is down, there should be a decline. I find the average move the next day of 132 such events is 0.03 %. I find similar random results for intra day manifestations of this terrible affliction. So I will meditate and count some more.
Russ Sears writes:
An integral part of the 12 steps is accountability. You don't slip off the wagon because you don't want to have to admit it to the group and your accountability partner. Further, you recognize the triggers and you call the accountability partner to talk you down from the ledge.
In October in Canada, I attended an Enterprise Risk Management Conference where several heads of large Risk Management Departments talked to the group. It appears the regulators have adopted a system of 3 level of "challenges". That is they document times risk rules were broken and mistakes were made, either unintentionally or by bad processes at 3 different levels.
The first level was self or departmental reporting. The second level was outside department but internal to company (either internal controls or internal customers) and the 3rd level was external auditors. Each level was expected to have some "challenges" and write up how to improve them, and give a degree to how material or risky the error was. The right number of challenges and the degree of rogue risk was determined. Too little challenges or no serious violations were considered not taking risk management seriously.
The problem is, however, that this only prevents errors or rogue risk happening at the lower levels because it is a top down approach. But most companies fail because of strategic risk. Often in hindsight it is clear the strategy was guaranteed to make money short term in exchange for taking on crippling unavoidable long term risk.
This became clear to me when the Citi Risk Manager talked…The preamble to the "dance while the music is playing" quote played in my head.
They knew the housing market was a bubble ready to burst… But they also knew there was massive bonuses to be made before it struck and destroyed most of their company's equity.Nobody at the lower level was allowed to "challenge" their strategy, no matter how clear the fraud was to these lower level people.
In short, there are some risk rules that should never be broken, no matter how high you get. These may change as the circumstances dictate but they should always be defined. Allowing everyone to hold you accountable should be part of the any trader's 12 steps.
Chris Tucker adds:
Is there a twelve step program for traders that habitually get out too soon?
(20 minutes to close): "Daddy will you play with me?"
"Umm, give me a couple minutes honey" says he. "Let me sell this first."
He groans but dutifully closes all positions. "What are you selling?" He makes a half-hearted attempt at explanation. Then heads outside for frisbee and badminton.
Then comes in an hour later and berates himself in disgust.
He never called his sponsor so there was no one there to say "Just hold it 'til the close bud, you can do it!"
He makes dinner all the while promising that he'll do better tomorrow. That he'll call his sponsor. That he'll keep at least one contract open, even if it kills him.
And he wonders, deep down, if he really can. Or is it going to go on like this forever.
Rocky Humbert writes:
Mr. Tucker's whimsy is actually a profound question which is not easy tested:
Over a trading career, which is better: Exiting too early or exiting too late? Over a trading career, which is better: Buying too early or buying too late? (for a long only investor)
I would argue that for most fundamentally-oriented investors, the true killer is buying too early. I believe there are mathematical underpinnings to this. Perhaps other have a rigorous analysis of this problem. I've never seen this debated on the Dailyspec.
Ralph Vince writes:
I think it depends on how you size your way in. I find I am infinitely better to be too early — on exits as well as entries. But I scale in, gingerly, one toe into the kiddie pool at a time. But this is, essentially, entering and entering on limit orders, whereas to be late at both ends, is essentially entering and exiting on stops.
I'm very interested in your thought process as to why that would be more advantageous.
As was discussed pretty well on this site last summer, the US corn crop last year was hardly bountiful, courtesy of a drought. In Texas, the drought resulted in the base of many lakes being visible as sheets of dried/drying mud, with piers off in the sky above. I assume that the rattlesnakes didn't fare too well either, but as a severe herptophobe, I won't get into that.
It appears that the drought is here to stay for a spell. At some point, even the CPI will record the resulting increase in grain prices.
Russ Sears writes:
While reading about a drought is interesting from a historical perspective, it is a sure way to trade yourself into the poor house. If yesterday's weather is not already built into the grain markets; then the thousands of farmers who experience it and for years have bet the families bread, do not know what they are doing and should pack up and move to town and find work in auto repair, factory work or construction where they can still work with their hands but predicting the future is not part of the job. The joke on the farm is that these articles always start popping up when the local sail boat lake is once again in business and the next 4 days call for 3 inches of rain… as it is here in OK.
In the classic romantic comedy "His Girl Friday" the major plot is how Cary Grant wins the girl and keeps his best reporter from marrying. But the comedic subplot is how pseudo science gets sold to the public by throwing in key phrases so that public thinks they are more sophisticated than they really are. Not only are they up to date on current events, they understand the great social science and political thought behind it.
The newspaper wins by appearing on the cutting edge. The politicians aligned with the social scientists win since their theory is pumped. The public, though duped, wins by raising their self esteem. But in the days when women could be the comedic folio, to achieve this, the facts must be made to fit the theory, and it is only the reporter and her editor that are in on the joke.
A simple mathematician wonders how "eigenvectors" overcome the placebo effect of pseudo sophistication of wine tasting. And the mostly tea drinker in me asks the emperor's clothes buyer, "Is not the fun in the adventure of the trip, not the destination?"
March 12, 2013 | Leave a Comment
As the S&P approaches its all time high, slowly but steadily, one ponders the implications as it appears to be pre-ordained with the slow but consistent rise occurring.
It is well known that the markets' volatility are auto-correlated when the jump in prices occur quickly. But if the large change in price is slow but steady such as we've seen last few weeks, does volatility increase? Does this signal reverse trends are more likely than normal? Of course this needs to be defined better, yet, I wonder if someone knows the answer(s) from previous studies?
Rocky Humbert writes:
Russ: There are multiple answers to your question.
1. Firstly, you have to differentiate between the VIX (which is based on a "market" estimate of future volatility using live options prices) versus the actual realized volatility. It is theoretically possible — in fact, quite likely — that the VIX can diverge from actual market volatility for long periods of time. Right now, the VIX is about 11.5% and the November 2013 VIX future is 18.90. So right there, you see the market has priced in a higher VIX. Assuming that this market is efficiently arbitraged, it means that 8 month options are much more expensive than 1 month options. There is some path dependency here, but in a nut shell, it means the answer to your question is no, eh yes. (That is, Mr. Market believes the answer to your question is yes in the longer term, but no in the shorter term.)
2. Secondly, the definition of volatility is simply the standard deviation of returns. As a silly example, imagine if the S&P went up by 5% EVERY SINGLE DAY. In this absurd example, the VIX is extremely low (even though the market is going bonkers), since it's a monotonically increasing value and the change in returns every day is 0. (That is, so long as the velocity of the market is constant, there is NO volatility.) In this silly example, I would expect the spot vix to collapse (due to arbitrage) but the long term vix futures would explode. (It's important to not forget how the VIX is calculated.) Similarly, if the S&P were declining by 5% EVERY SINGLE DAY, the VIX would also collapse. Again, a stupid example. But the math doesn't lie. Of course, the historical behavior of markets is that things don't move in a straight line. But for any given period of time, markets can and do move in a straight line.
So to answer your question precisely, "if a large change in price is slow but steady does volatility increase?" one must note how the calculation is made– and one must further appreciate that monotonically increasing or decreasing markets are the very definition of low volatility. The short answer therefore is "NO".
All of this begs for (and rationalizes) why as someone who sees very little value in the S&P, I am still making some nice returns by owning short dated call options (and I periodically roll up my strike prices.) This strategy will work until it doesn't. But it's already worked long enough to justify the simplistic assumptions underlying it — which is that I neither want to be the greater fool nor the lesser fool. Just a profitable old fool who plays the hand that I'm dealt. Not the hand which I wish I was dealt. Nor the hand that will be dealt tomorrow.This period will undoubtedly end with fireworks and tears. But when and from where? That NO ONE knows. Keep things stupid and simple….
Sorry for the link but I found this article fascinating and worthy of the share…
China has been running the world's largest and most successful eugenics program for more than thirty years, driving China's ever-faster rise as the global superpower. I worry that this poses some existential threat to Western civilization. Yet the most likely result is that America and Europe linger around a few hundred more years as also-rans on the world-historical stage, nursing our anti-hereditarian political correctness to the bitter end.
David Lilienfeld comments:
Four thoughts on reading this piece:
1. Every time someone tries to selectively breed a population, you get lots of unexpected diseases showing up. Sometimes, those diseases affect only a small segment of the target population. Other times, a larger segment. I doubt that this effort will be any different in result–and it may result in a higher rate than the Chinese are prepared to accept. Imagine, for example, that the process results in 5% of the target population having an accelerated version of dementia, perhaps starting in the early teens–before these individuals have much ability to use their IQs to advantage (contributing to the society). The costs of care will challenge China in ways it hadn't anticipated, particularly given the population implosion already in place. Moreover, one doesn't know if these alleles code for a protein, serve a regulatory function, or both. Taking the alleles out of the genome could, potentially, interrupt their ability to function in the manner expected. So I don't think it's necessarily "game over".
2. Malcolm Gladwell noted in Outliers the value given in East Asian societies to patience, something lacking profoundly in Western societies these days. However, if one starts to breed a specific genome, do those individuals have the same willingness for patience? I don't think that we know that this advantage in East Asia is simply cultural. There's also the need for innovation. East Asian societies do well in innovations in quantitative areas, but translating that strength to the consumer/business arena hasn't been so straightforward. Until there's a demonstration of consistent innovation from those societies, this will be a question mark. Now, how long before such innovation becomes visible? I have no clue. Perhaps this activity is already present and I've just missed it (in which case I'm sure those on this list won't hesitate to provide some education of the fact).
3. There's a related issue: the social dimension. What sort of society results from such breeding? I'm reminded of the Foundation trilogy–the First Foundation engages in all manner of production advances–lots of innovation, etc. There's rumored to be a Second Foundation, but it's not really clear what that entity is all about, or even if it exists. (Spoiler alert): It's the Second Foundation, with its sociological orientation that comes into play and addresses the sociological and related problems resulting from the First Foundation's success. (The trilogy makes for short reading, and it's some of Asimov's best science fiction.)
4. The sociological dimension isn't a minor one in China. Chinese sociology isn't one of the country's strengths, and I think that's part of the reason Chinese epidemiology is weak. Even if this area becomes a focus of development by the Chinese government, it seems unlikely to change for at least one generation, more likely two or three. The nature of sociology works against efforts to speed up capacity and capability in it. I suppose one could let any social changes occur and deal with them piecemeal (as we have with our drug problem–locking up 2-3% of the population), but I don't know that that would be acceptable in such a new society. I'm speculating, though.
Just some initial thoughts. It is provocative, I agree.
Russ Sears writes:
The reason eugenics does not work on humans is simple. They are using the wrong evolutionary strategy for our species. We are not a survival of the fittest species. We are a "Survival of the First" species. We have dominated a vast new land called abstract thought. Further, we are a species of super cooperators when the cooperation is through mutual respect and trade-offs we exponentially increase each others wealth. Putting this together we, have captured vast new resources of wealth.
If you want a superior more competitive people you do not measure by the conformist standard of the "greatest" in XY or Z. Even if X, Y, and Z are abstract thoughts, it is not NEW abstract thought, it is standardized testable conformist abstract thought. You measure in how much risk they willing to take, how much they want to be the "first", how they want to try new things, how they look at failure not as a step back, but one less step to the right path and how much they value Liberty and unsupervised willingness to risk failure for the chance at great success. You give yourself a group of people willing to risk losing everything for a fresh new start, because they believe working together, they have what it takes to create a new world for themselves. You breed those entrepreneurs with those who love entrepreneurs. Then you have people that create new wealth, because they did not do what they were told. They had a dream and saw a vast new land in being the first in this new niche area. Once the path to this vast new wealth are clear, then many people will willingly follow. If you want to live where leaders believe they earned their authority by superior skills, NOT correct risk taking, then you will find a world where the leaders are those best at tearing everyone down, do not value diverse thinking from their expertise and taking from those that took correct risk to create the wealth.
Russ Sears adds:
One of the big lessons from the crisis was how correlated those in crony capitalism can be. Because the deception and corruption runs deep within all those in the same crony businesses.
AAA and highly rated corporations meant little. Their conjoined downfall was never within the realm of possibilities in all the models.It is interesting that those that did best were those able to see the fraud within or at least the log in their neighbors eye: versus those that, to the end thought their prior outperforming was due to their own brilliance and not undetected fraud and deception.
As high as is the ROI on crony capitalism (and I'm sure it's VERY high), it's probably even higher in other avenues of endeavor, such as for unions. Payoffs to unions under the current Administration have been phenomenal. It was also very high during the 1930s.
February 4, 2013 | 3 Comments
The professor once performed a beautiful study to see if all the turning points that one could retrospectively select
to be short and long a la birinyi who shows almost 5 times the market drift by getting in and out of the bear and bull markets with 20% being a fuzzy base line , —– and he found it completely consistent with randomness. It was a model of what a good study should be. Perhaps he will share it with us again, or at least tell us the drift.
Richard Owen writes:
That would be great to see. It is definitely one of the most mumbocentrically diverse areas of asset analysis and a firm and incestuous friend of the buy and hold debate. The more important corollary to the depressing corollary would therefore be that successful investing is almost entirely about the quality of your liabilities? Would a Japanese salaryman wealth manager with the Professor's report in hand have been able to maintain a career? If not, would he have been right to get a copy of Taleb out to console himself?
Charles "the professor" Pennington writes:
I have kind of forgotten how that went, but I will see if I can find it.
There was a study of something kind of along those lines from Big Al and/or Kim Zussman not so long ago that was very compelling, covering dozens of possible trading strategies, but only one or two could thread the needle and do better than random.
Russ Sears writes:
Not as rigorous as the Professor's, but I did a back of envelope study of the Dow from 1900 to 12/31/2012. Not including dividends, just the index.
There were 20 beginning of the years where the Dow was less than it began 10 years (of course these have overlapping decades).
What do do if you retrospectively find yourself in a "Secular Bear Market"?
The next year change in the dow average +14.35% min - 23.5% max 59.6% stdev of 21.1%. Whereas the overall was 4.7% and stdev of 20.9%.
Likewise the next ten years change based on roughly 20% steps of prior 10 years (again overlap) This only covered 1910 to year end 2012 since I needed 10 year periods before and after. There were 2 years 2008 and 2009 that the decade prior was negative, both had positive next years. But we do not know what it will be in 2018 and 2019 so they were not included. Here the overlap does matter since the next 10 year periods are not independent.
Count group avg Range for Group Next 10 years Range for group
19 -16.8% -49.7% 1.4% 108.5% -3.6% 271.7%
19 16.9% 2.0% 33.0% 82.0% -39.0% 238.8%
19 60.2% 35.4% 98.1% 95.8% -15.1% 240.1%
19 137.9% 98.5% 169.4% 75.2% -39.8% 323.4%
18 240.9% 172.7% 323.4% 96.8% -49.7% 317.6%
Richard Owen writes:
Very kind and thoughtful work! Apologies to be very dumb: what periods do the five groupings of 19 counts represent? And group avg [col 2] (I would have thought trailing? But the premise is those periods were negative?) The "excluding divs" heuristic so common for stock analysis is, I guess, one reason why we need King Dimson so badly.
Russ Sears writes:
The period in the five groupings in the next decade. Hence, may double, triple or more count some years. It takes some time for the "past decade" to move into another grouping.
A Warning that Engendered the Discussion from Victor Niederhoffer:
Please don't write more as you have threatened about "secular bull markets" or "secular bear markets" that can only be described in retrospect and have no predictive significance, and are mumbo jumbo and depend on random selected starting and ending points and would only lead our fine readers to wallow in absurd, unhelpful charlatanism.
I suspect that Lance Armstrong's confession on TV had to do with last Thursday's deadline for the US Federal Government to file a Qui-Tam (whistleblower lawsuit) action against him, based on information revealed by Floyd Landis (another doping Tour de France winner who denied doping for years after testing positive).
Qui-Tam lawsuits reportedly date back to the war between the North and South of the US, when the US Federal Government (North) offered a 10% share of money recovered from anyone who squealed on anyone defrauding the government. All the whistleblower has to do is talk, and the feds have a certain time to decide to pursue the case or drop it. If they pursue it, their likelihood of winning is very high, as they have infinite resources and many other advantages, such as the courtroom procedure where they plead their case, then the defendant rebuts, but then instead of the decision being made, the feds get another chance to rebut. This and other advantages, combined with the threat of criminal prosecution, lead many defendants to give up. In Lance's case, I suspect it could cost him more than all the money he has, or would likely be left with after the other people expected to get money from him get what is coming to them.
Press articles while he was still denying doping were in two categories - the ones that mentioned that he had tested positive for doping, and those that did not. He tested positive for steroids in I think his first Tour de France, and afterword produced a doctor's letter saying he had been taking a prescription saddle sore cream containing steroids. A doctor's note after a positive test is no defense, and the rules are clear on that - and printed on the back of every racer's license. But, he was let off the hook because he was a big shot by then, and it was not in the interest of anyone involved with the sport, including sponsors, to have him banned. Much later six of his blood samples tested positive for synthetic EPO.
EPO is a chemical produced naturally in the human body, which stimulates production of red blood cells. The fake stuff does the same thing, and was at one time the most commonly prescribed drug in the world. For an athlete, extra red blood cells mean increased Oxygen carrying capacity, which means riding a bicycle up a mountain without getting out of breath. And in training it means stressing the muscles all that much more than a person with normal aerobic capacity could do.
There are a least four ways to increase red blood cell count, two of which are legal in bike racing, two of which are not. The two legal ones are training at a high altitude, and sleeping in a tent at night with reduced Oxygen levels, both of which champions have done. The two illegal ways are taking synthetic EPO and blood doping, which is removing a pint of blood a month before a race, refrigerating the blood, and then putting it back in the night before the race, leaving the body with extra red blood cells.
In the early 2000s there was no test for synthetic EPO, but a few years ago, when the test came out, samples of Lance Armstrong's blood which was taken in early tours and kept frozen over the years was tested, and all six samples came up positive. That makes 7 positive tests that were widely known to the public during his years of denial. The rest is history.
-Henry Gifford (Former NY State champion bike racer who has never taken any drugs or drank any alcohol).
Russ Sears writes:
People could forgive the drugs and cheating, but they will not forgive the bullying and using LiveStrong as a front to further this bullying.
I have seen it more than once, when a rational guy starts taking steroids he starts having a g_d complex.
With the new sudden success, and the mangled brain, it leaves him thinking they are above justice, everyone else is blind. The changes seems so obvious to him that he is on juice. The accolades so addicting.
The justification that everyone else is doing it and getting away with it convinces him that fate has singled him out for greatness and he cannot be stopped. He is the only one capable of understanding the truth.
This was true from the kids on each stage level from the c level HS basketball team to the Olympians winning medals. It was sad and pathetic seeing the HS coach confront a juicer, it was an epic tragedy at the elite levels.
Ralph Vince adds:
Reading Russell's post made me think "Does he mean Armstrong… or Obama?"
Drinking my morning coffee, listening to the what was Florida wilderness out back being churned and converted into housing. Local strip malls, parking space unavailable. I watched Reagan's tax cuts met with a rolling market by August of 82, then watched the largest tax hike in history, announced at the SOTU of 93, met the same interval of time later with another rolling market.
America is so big, it's economy so massive and with a mind of it's own, policy bounces off of the mammoth like the arrows of pathetic, little men. Rome rumbles on. It occurs to me that the president, in all his rockstardom and oprahglamour, is as relevant as Armstrong.
One concept common in turf handicapping is the speed rating. It's not so much whether the horse wins the race, but what its fastest time was for a given quarter or some such. One wonders what the ideal predictive speed ratings for markets are. If we come up with the answers, we may be able to contribute to the ecology of the system and possibly prevent our losses from being as great as the public.
Gary Rogan asks:
At first glance, I'm wondering is the history of speed ratings for any markets likely to be as predictive of the future as it is at the track?
Russ Sears writes:
When someone is starting training for distance running, it is important to understand the maximum heart rate. Then training is geared around this number. The pace you should run to achieve different objectives is a range of percentage of this number. For example a speed workout, you might want to hit 90-95% of this rate. For a recovery run, maybe 60%. As you learn the pace to achieve these objectives you can stop measuring your heart rate and then go off feel.
However, as you get fitter, it becomes more about the recovery time to a base rate. The time it takes for your heart to get close to pre-workout rate will get shorter as your fitness increases. Then as this get shorter, you can increase the pace or shorten the recovery time between faster intervals.
It would be interesting to carry this over to individual stocks with volatility analogous to heart rate. Shocks such as earning numbers analogous to workouts. I hypothesis "fit" companies are ready to take more risk and have higher expected earnings. Whereas those whose long vols are increasing may be more likely to fall apart if they take more risk.
Anatoly Veltman writes:
I think that Chair is often faced with an exit problem. Statistics prompt justifiable entry– but then one is prone to take profit too quick, or not be sure what to do about a loser, which only looks statistically better and better the more it's losing.
Therein lies the huge difference between binary outcome in most sports/games, and the investment field. I recall one Palindrome saying: "it's not whether you've picked a loser or a winner; it's more important how much you have ON when you're having a real winner".
An avid observer of track and field legends since watching my first Mexico Olympics live on Soviet TV in 1968 (the black power pedestal protest contributed to airing of that broadcast!), I always attempted to grade medal performance against the world records. I can name dozens of great Olympians, who peaked out during certain Games (sometimes 4 years apart, and even 8 years apart!) — and never held a world record in their event; and vise versa…phenomenal record holders, who've failed to taste Olympic success. But most of them did achieve both — which, again, makes statistical sense.
Alston Mabry adds:
A core "speed rating" question is around the effect of news events such as earnings surprises. The nature of earnings surprises has changed over time, as companies have learned to manage earnings more precisely: "Rich Bernstein Explains Why Missing Earnings Estimates These Days Is Such A Disaster". And then there is an assumption that market efficiency means any true surprise will be reflected in the market within minutes. But is this true?
A lesson I learned from Einstein is the benefit of being able and willing to changes one's mind. At times a pacifist, he changed after witnessing the rearmament in Europe. In physics and science in general when presented with new evidence it is quite normal to revise theories and mathematical proofs, or even to reverse a position entirely. Putting ego aside, he did this many times, most famously dropping his famous Constant variable regarding a static universe when through experiment it was proved no longer necessary. This is skill which comes more naturally at a younger age, but is quite possible for the post 40 crowd as he demonstrated in his long career.
Russ Sears writes:
It seems to be increasingly clear that part of Einstein's long term productivity was due to his long walks often with Godel. It makes me think of this article: "Exercise Grows Brain Cells".
Dr. Brett S. maybe able to clarify, but it is my understanding that some of the latest ground breaking research shows that "changing your mind" is more than just a figure of speech. It appears that meditation can reroute the neuron wiring especially between the regions of the brain. This may also produce new brain cells. Or perhaps it uses the new cells produced to strengthen the bridges between regions.
Brett Steenbarger adds:
There's also interesting research on brain changes following successful behavior therapies, such as treatments for phobias. And, yes, a good amount of research on brain changes related to meditation practice. What's most interesting is that the brain changes following effective medication are nearly identical to those following effective talk therapy:
November 29, 2012 | 2 Comments
I found this interesting post on Seth Robert's blog:
One of my students grew up and went to high school in Nanjing,
population 8 million. Her acceptance to Tsinghua was such a big deal
that when her acceptance letter reached the local post office they
called to tell her. The post office also alerted journalists. When the
letter was delivered to her house, there were about 20 journalists on
hand. One of them, from a TV station, asked her to say something to
those who failed.
Russ Sears writes:
I found it a very sad piece of social commentary. At some point it becomes not about your ability to think, but only about what you know they want. It becomes less about answering the question than knowing what questions the test giver will ask and answering it strictly as they want. You begin by eliminating the questions that cannot be tested.
Where are the questions that take a lifetime to answer?
Where are the questions that do not have a standard knowable answer?
Leo Jia responds:
Well, it surely does not find an Einstein.
But society is not all about geniuses. It requires the performances of normal people on a much larger scale. In that regards, one shouldn't underestimate the advantage of someone's ability in passing intensive multi-disciplinary tests on high scores.
It takes tremendous discipline, dedication, and hard work. But it is not simply about memorizing answers. More importantly, the abilities to plan, to achieve, to think smart, to always be confident, to stay away from distractions, and to beat out stresses along the way are all crucial. It is about winning a game, a mimic to some of the games that are crucial at various stages in life.
Is it worthwhile for all the kids to spend all the efforts in order to pass the tests? Definitely not to those who lost — a high percentage of the people involved actually. They are clearly not good at the game (perhaps they have learned a lesson through the failure). So overall, the society has wasted quite substantial energy — the energy spent by those on the wrong game. But perhaps that energy can not be saved anyhow. It is just like the market where there are winners and losers, and the losers are required there to supply the liquidity and to make the winners winners.
I fully agree about the deficiencies of the education system, in the sense that it does not serve individual talents very well.
But unfortunately, the modern education system since its inception in the Industrial Revolution is more on social conditioning than anything else. We perhaps shouldn't expect more from it. The Chinese, finding that it fits well into its own tradition, have just pushed it more to the extremes. I don't know how to abolish it all together and what to put in its place. Would a system that only focuses on producing talents (we have to define the meaning here) work? It most likely would for the talented individuals. But overall? Certainly, a lot people have various kind of talents. But don't we agree that a high percentage of the population don't have much talent? If a system is only for talent, then what to do with these people? Moreover, talented people generally tend to be somewhat eccentric. Can a society endure too much eccentricity?
To answer my own question.
Using the last 100 daily returns of SPY as the "x" and HDY (ishare High dividend ETF) as Y I got the following linear regression:
y = 0.6279 x + 0; with R^2 of 68.2%
and today .52% - 1% (.63) gives negative Alpha… -0.11.
Certainly within statistical significance bounds, but negative none the less.
Jack Tierney writes:
I hold a number of dividend stocks and find that although there are more up than down, none of the moves is substantial — certainly smaller than those of the general averages.
What interests me right now is volatility — something that has never been very good to me, but I took a TV break this afternoon to see what the CNBC wise men and their guests think. It would seem that many are expecting Obama to win, the Senate to remain Democrat, and the House to remain Rep.
If today's market is reflecting that expectation, it would take only a couple of votes going the "wrong" way to upset this equilibrium. If the surprise is at the presidential level, the move could be huge…but not necessarily positive as many believe. On the contrary, there is a sizable portion of electorate that not only feels the President should be re-elected but that it is "owed" to him. If they are disappointed, I would expect them to demonstrate their unhappiness in no uncertain terms.
Almost equally disruptive would be a "no-decision" result - at least until a recount (or several recounts) are completed. All this is supposition, but not entirely out of the question. In any event, at least according the Art Cashen, it's not unusual for an election day bounce to be followed by a following day re-tracement. The Chair with his many readily available facts and figures would be able to affirm or deny this.
November 2, 2012 | 3 Comments
Bullies, as adults, generally abuse their authority. If you stand for excellence and have some success you will attract the attention of bullies. It has been my experience that bullies hate a good success story but despise the successful more for the attention and admiration of others than their success. The heroes of myths, Bible stories, and legends are often victims of the drummed up accusations of bullies. Apparently, most ancient cultures were gravely concerned with bullies in everyday adult life.
Here are several tells that a bully's complaint against you is a witch hunt rather than legitimate complaint:
1. You are singled out after publicity.
2. Many interviews are held and are fishing expeditions of your weaknesses.
3. In these interviews, there are two types of witnesses, those that routinely support the bully and those that are intimidated and gladly rat out their neighbor to get the bully to leave their doorstep.
4. The interviews are one sided.
(It is widely known that the bully and their cohorts have immunity for much more corruption. Interrogations do not happen for them. Romance, money and power are often a triangular core. The bully often is a mistress of the ruler in the stories)
5. The bully often will intimidate and harasses the friends and family who would give the moral support to the victim.
6. It makes no financial sense for the bully to waste so many resources pointing out your minor faults.
It makes sense to do whatever it takes to rid yourself of an organization that allows one to be bullied.
I wonder if the moral implication of the ancient stories is correct, that rampant bullying is a subtle sign of an empire or emperors impending sudden chaotic demise…
An individual defines him or herself as the sum of the impact of memories as well as the person he or she is today. While others, for the most part, define him or herself as he or she appears to them today.
Often this creates an anxiety and tension between the past and the present. The kid wanting to grow up will try to prove it by doing stupid stuff to show that he old enough to handle it.
And likewise the young adult longing for the comfort of his childhood, will often do something stupid to show he's still a kid and needs the protection of adults. The young adults will often swing between these two extremes in a matter of moments, as part of him wants to grow up and part wants to stay where it is safe. The good kid with great parents and a comfortable life, often has a harder time wanting to move forward, while the "rebel" with a hard life or poor adult figures in their life will often look to distance themselves from their childhood.
Performance anxiety can stem from this. You see yourself as the dumb awkward kid, while the audience sees you as the expert educated adult. By performance I mean anything you do where others are your audience– writing, speaking, analysis, and any artistic endeavor. Besides showing off for the girls, this I believe, is perhaps the reason we often do stupid stuff and also why we can struggle to show our full potential to others.
I have found that recognizing this struggle within yourself and acknowledging and making peace with that kid in yourself can help tremendously with these fears and self doubts. Your art will shine brighter if you let the kid in you that was blown away by ever new worlds that were opened up to them shine. And your analysis will be appear more confident if you see yourself as the adult in your presentation as others do. In other words, embrace the dichotomy, don't hide or internalize it. Acknowledging these two selves, I believe, can help young adults not do some of the stupid stuff they would otherwise find themselves doing.
I have found that acknowledging this geeky 4th and 5th grader inside me that was excited by math, science and the wonders of the world while I am presenting something, writing something or analyzing something can help, yet also seeing that 4th and 5th grader, that dressed funny, was a runt, and totally confused by socializing, especially with girls, was charming, but not who I am today. Also though I expect others to see me as an adult, I know that showing the kid in me makes me much more likable and makes it harder to discount my opinions.
I'm a big science fiction fiend. Growing up, I went through the Asimov trilogies (and lots of his other works, some of which took on new meaning after getting drunk with him at a bar at a science fiction convention), the John Campbell stories, Niven's Ringworld series, Haldeman's Forever War series, and Dickson's Chylde series, with the latter as a particular favorite. Lots of things we now coming to reality were talked about in these novels and stories. As a group, these writers (excepting Haldeman and Heinlein) tended towards optimism about the future–the human condition would improve, albeit with changes in what was defined as work and how societies functioned in the process of that improvement. Then an interesting thing happened during the 1970s/1980s. While many of these authors continued to write, the new writers were hardly optimistic. When I was at the local Barnes and Noble this evening, I was struck by how dreary the worlds portrayed by current science fiction writers have become.
Is it that we as a society are lacking in optimism about the future–so much so that we are no longer able to imagine one with a positive image (I understand that there are those on this list who will suggest that this is merely my perception, to which I acknowledge it as so being)? Much of the talk about raising/lowering taxes represent incremental changes. I'm thinking about paradigmatic changes; those are the changes that might address some of the challenges of the moment, whether it's water, energy/natural resources, pollution, health and disease control. Perhaps it's the dreamer in me, but if we can't imagine a future in which the human condition is uplifted/bettered, how are we going to achieve it?
Ralph Vince writes:
I've been noticing much the same thing, particularly with the 20-somethings I am routinely around. The dark, negative future they all, pervasively envision is something I have never seen in such one-sided fashion before.
I've given this a lot of though in recent years and have come to a few conclusions you may or may not agree with — regardless, I'm interested in yours and others thoughts on the matter.
I think we DO progress — I think man's progress is ever-upwards in fits and starts, but, viewed through the lens of 3 or 4 generations, has persistently been higher. I think much of this is incremental, almost unnoticeable however.
Lately, I see changes in pop-culture themes that would make me think that the dark era of the past decade or so is coming to a close. I've mentioned walking into a high-end furniture stores, and the colorful, Dr. Suess-looking furniture invoking a sensation of almost giddiness. I see it in the extreme use of bold colors in television ads of the past 12 months or so, in women's fashion and the elaborate, loud footwear now, and hear it in the driving vocals, unwavering, non-tremulo female power voices replacing the warbling songbirds of the recent past.
The mass mood is changing, it's moving in a new direction already. You won't see young men in pinstripes, though you may, by next year, see the resurgence of seersucker (I've been trying, really, really hard on this last one!)
However, just as change occurs incrementally, it also comes in BOOMs. Jonas Salk, Louis Pasteur……Air conditioning, transistors…….the magna carta.
The Santa Maria.
I've alluded to the enormous undertaking of the interstate highway system (post 1950s) and the transcontinental railroad here as things that paid off many fold.
And we've just been stuck in a period of stasis which I think is bigger than politics and politicians, era's where things are just intractable, and the stasis, like large fields of ice, just take time til things become dynamic again.. To-wit, I present Barack Obama's administration. I truly think he/they IS/ARE committed liberals. I think there truly DID intend to close Gitmo, and many of the other things that didn't get done and are being pointed to (I'm not taking a political stand here, not making excuses for the administration, just pointing to evidence to support my "over arching stasis as a natural impediment to dynamism" idea. We've had periods in history where this HAS been the case. (the natural state of politics in a democracy IS stasis. I think had Obama NOT had a supermajority in his first year, a situation where he has to have every one of his party on board and, it would have been easier for him, and odd twist in our politics)
At some point, the stasis will give and dynamism return — I would venture a guess as a consequence of some unforseen invention again that elevates our existence in a quick burst once again.
I think the more "paradigmatic changes" as you say, are very rarely, historically, the result of political structure changes, of which there have been few throughout human history. Usually, it seems, these changes are a result of increasing the geographic perimeter of our existence. These things HAVE transformed cultures. Were the Romans not transformed by their excursions into Britain and particularly the Eastern Mediterranean? Wasn't the old world transformed by Columbus and the Iberian explorers of the 16th century? At some point (I will not be here) our perimeter will expand, and political structures will amend to the new reality — new problems will be solved.
In the immediate, when I see the one-sidedness of dark expectations among the young-n-naive (who will not all be right), and I see the mass mood of culture assume a new energy, I don;t think we will see an paradigmatic change any time soon (are these things even predictable?) but I do think we'll see a more optimistic era here in the coming years, regardless of who holds political office.
Russ Sears adds:
While I admire and agree with both your optimism and lovely essay. I believe the turn to pessimism for science fiction has a much simpler explanation. The education system and elite culture has made it a crime to be a boy and has marginalized the importance of exercise, sports and competition for the intellectual boys. The results has been a rigidity of thinking, especially amongst those scientifically inclined. This ignoring of innate emotions causes internalization and depression It has been sad to see as my daughter is attracted to these intellectual young men, but is put-off by the cloud of doom many carry around.
There is an emotional side to all thinking, What the "rational" mind thinks must subconscious join with base instincts signals of the mind to be accepted thought. Rigidity in thinking, without a recognition of the emotions, is the opposite side of the "angry" trader. It causes one to miss the short term bringing out the canes, and the long term emotional side to central planning, fed policy and brinkmanship politics. In both cases, I believe can be shown, that these time periods are not independent random variables, within statistical significant.There also appears to be a symmetry that plays out between short vs long term non independent market movements and respectively stocks vs bond markets. Which I find quite beautiful. But I will leave both these as exercises for the reader.
I think we can all agree that pursuing one's conviction in life or even a demonstrated talent is hard. Most successful people would contend that the key is through perseverance, resilience and so on. In other words, one should not give up during hard times. I think this should be true for most successful people on this list who have indeed withstood some hardship in the early career but never given up.
This is in sharp contrast with the mostly agreed approach for trading, where quickly admitting mistakes and reversing course is very key. I don't deny that someone may be doing it through perseverance (is Buffett doing this way?). Even Soros has remarked that admitting mistakes is key for his success. It is interesting here that admitting mistakes only applies to every single trade, but not really to the hardships in one's career.
There is the saying about when to hold and when to fold. For career success, the focus seems to be "hold" on, but for trading success, the focus is to "fold" quickly.
How would one reason about the two different approaches or philosophies (perseverance vs. change)? Is one of them wrong?
Craig Mee writes:
Leo, I would humbly say, one is a number game, and the other is what you do…and with that you can certainly do some fine tuning. Problems may arise from a number of things not central to what your preferred "business" is.
Russ Sears writes:
As a marathon runner who use to be national class, it has been my experience that persistence is only part of the battle. It is very easy for a proclaimed prodigy to persist. What is hard is learning to turn a short term loss into a long term lesson for life. If you watched the Olympics here are a few things that the athletes seemed to do differently than most people.
1. They embraced the pain. Training and hard work was enjoyed. But they also learned from their losses, injuries and general hardships in life. Perhaps these fires are the purifying necessary part of the upbringing that the prodigy misses. Learning to believe in yourself despite what others say, turning losses into a chance to strengthen weaknesses. Things whose first order effect is negative but whose second order effect can be positive are highly favored.
2. They were optimistic about their chances, with a healthy dose of realism about their abilities, their current condition and plan. Before and after the event there were no excuses. They had a plan, believed in the plan and stuck to the plan.
3. There were very few people's opinion that mattered to them, their coach, their immediate family (Dad, Mom, Husband or Wife). They did not care what the critics said, they did not depend on crowd support and were not disheartened by disfavor.
4. There were many opportunities from competition. They found their niche from competing more. While the Olympics may be the showcase for their event they were not dependent solely on its outcome. Worries melted in abundance of gratitude to coaches, training partners, family, other supporter, G_d, and country
5. They were focused on the task at hand. They knew how to avoid the distractions and discount the hype. Yeah, this may be the defining moment in their lives and how they may build their fortune, but as the song says "there will be time enough for counting, when the dealings done."
6. There appeared to be admiration for their fellow competitors. This Olympics were notable in that there were fewer accusation of doping, tainted judges (with a few exceptions about some referee) and general cheating scandals. The badminton scandal being the biggest scandal, suggests to me that the athletes were into the competition more so than the best way to game the system. Perhaps this is an inverse reflection of the markets. Or perhaps simply the media has become part of the cover-up captured by the hype, rather than the watch-dog.
September 6, 2012 | Leave a Comment
I disagree that the Fed is the major long term source of how governments are affecting the markets. This is a short term, old school way of thinking. Not that a trader can ignore this.
The major source, I believe, is benefits to seniors and the uncertainty that surrounds them. This is a global issue. The current projectories are clearly unstable, but the politicians have turned it into brinkmanship maneuvering of Euro and budgetary fiscal cliffs.
If in the 80s we conquered inflation by finally understanding wage expectations, in the 21st century will we conquer deflation and societal extreme risk aversion by benefit expectations? Is there an answer? Are we doomed to politicians promising and giving in the short term more than is possible in the long term for the vote? If so, where and when must it all come crashing down?
Gary Rogan writes:
You say in the 80s we conquered inflation by finally understanding wage expectations. I thought inflation was conquered by raising interest rates by a huge percentage. Is that not the case?
Russ Sears replies:
Yes, that was "how" it was accomplished, I am suggesting "why" it had to be done that way. It was the wage price spiral or "inflation expectations". They had to convince people they were serious in lowering inflation long term. Not flood the world with $ every time it was politically expedient to do so.
Gary Rogan adds:
I realize there were inflation expectations and they were blamed for inflation, but fundamentally there was just too much money being created. I don't think we disagree, I just learned to think of inflation expectations as being derivative to the money supply. Whatever the details of inflation creation, you cut the money supply and inflation will be gone sooner or later. Less money = lower inflation, whatever people believe.
Rocky Humbert writes:
If anyone can demonstrate with any degree of quantitative rigor
(1) How politics can be quantified.
(2) How politics can be predicted.
(3) How either of these things can be useful to investing in an objective way, then I will embrace political discussions wholeheartedly.
But before you folks try to go down that path, I have to point out that if you own stocks, you should pray for Obama's re-election. (hah)
David Lilienfeld writes:
The assumption on the Dem vs Rep analysis is steady-state, i.e, the structure of the economy is steady-state. In the age of globalization, that's probably not true anymore, so the analysis, while interesting, isn't informative about what the future might hold. Further, I don't think it will much matter which party wins the Oval Office economically since both parties are going to try to spend like crazy. The alternative is to control the deficit, which may have long-term benefits but which will have short term political pain. In an age of instant gratification, I doubt that the politicians of either party are willing to take the chance that their prescription for the economy will show its benefits before the next election. Just as Wall Street analysts live and die by the next quarter's earning, so too do politicians. Call me naive, but spend and let someone else figure out how to deal with the consequences has become as American as apple pie. I see neither political party providing any basis to suggest otherwise.
A common mistake that stock people do I think is to pay attention to the increase in sales numbers. What does this have to do with future profits? I would think there is zero correlation given the earnings change since sales are so easy to manipulate by such things as discounts, pre-orders, and incentives for early buying, and reducing inventory et al. How did this ridiculous emphasis on the sales increase become as or more important than earnings relative to expectations in affecting stocks after the earnings report? I recently met with a pairs trading outfit and gave them 100 reasons I don't think it works, but it was from the seat of my pants. The main reason was of course that it goes against the drift. It hedges against the 10,000 fold return.
Gary Rogan writes:
If sales increase while profits are decreasing, that's a bad sign. However when profits increase while sales are decreasing, this may be very good, but it can't go on too long. Sales trends gained influence as a counterbalance to profit growth being fudged. When you have profits, sales, and cash flows all increasing in unison and indebtedness not increasing, that's as good as it gets.
Jeff Watson comments:
Profits increasing while sales are decreasing are usually a sign of increased productivity, better inventory management, better management of labor, and better management of capital. Although Gary says this scenario can't go on too long, it really can go on forever.
Gary Rogan replies:
Well clearly it's mathematically possible to decrease sales by .1% per year and increase profits by .1% per year close to forever so "too long" was perhaps a bit harsh, but at some point in the real world gross margins become so high as to make further advances impossible due to competition or substitution. My statement was prompted by not being able to recall a real scenario of sustained profit growth and sales decline resulting in a good outcome having looked at hundreds of income statements, but I've never made a study out of it nor have I looked at multi-year trends. When customers are buying less of your stuff year in and year out that usually means they are not excited about your stuff, because they don't like it but perhaps in this case because the price is too high for them to use more of it. When customers get into the habit of using less of your stuff, that's hard to fight.
Jeff Watson adds:
The Chair is 100% correct. Going back to Sears as an example…their aggressive pricing will only squeeze their retail operation out of business(if continued long enough), as prices this low are unsustainable in the long run. If a store has a 30 percent increase in sales after implementing a big sale, but it's gross profit goes from 22% to 6% or less, is that a good business plan? Even though Sears is not increasing labor to handle the increase in sales, the model is still badly flawed. I understand that one of the most important things in retail is buying right, but I suspect that most of the things Sears is selling is a loss leader. Maybe they are subscribing to the old cliche, "We might be losing a little money on each sale, so we'll make up for that with the increase in volume."
Russ Sears writes:
Coming from the world of insurance, when things sell unexpectedly well the actuaries double check their pricing. The agents and the market will quickly spot when you are selling $1 or risk coverage for 99 cents. When I started, before rate books were online, a printing error cut-off the $1 handle of 70 year old women term life insurance rate per $1,000 (this was highest age we sold term to). The month after the book went out we had more 70 yr. old women apply for insurance than we had in the past several years combined.
In other words sales increases often indicate increase in claims volatility. Sales increases make me wonder if management really knows what they are doing. One wonders if this rule holds for the retail and stocks in general.
Carder Dimitroff adds:
I may be naive, but in some sectors I believe the top line could be critical for long term investments. I'm thinking of regulated and capital intensive companies like electric utilities, gas utilities, water utilities, pipeline companies, transmission line companies and MLPs. In a different way, I'm also thinking of non-regulated utilities, such as independent power producers, refineries and REITs.
In all these cases, if the top line falls, the bottom line is plagued by fixed costs, such as interest, ad volerem taxes, depreciation and amortization.
The second derivative of revenues in such cases is capacity factor. Low revenues suggest low capacity factors. Low capacity factors suggest troubled assets and long-term challenges. The assets could be partially stranded by market conditions.
An example is marginally efficient coal plants. With low market prices for natural gas, many coal plants find themselves out of merit and not dispatched (zero earnings for producing energy). When natural gas prices return, marginal coal plants are again deep in the merit order and they are dispatched frequently or continuously.
Julian Rowberry writes:
An internet marketing equivalent of over valuing sales figures is over valuing social media subscribers. Twitter followers, facebook likes, page views, ad clicks etc are all very easily manipulated.
Leo Jia adds:
Here is my two cents regarding growth vs non-growth.
The present value of a business without growth is much lower than that of a similar sized growing business. So one obvious question to any business owner is whether he would like to receive more money or not if the business is to be sold today. The answer is obvious. But one may counter: since he is making good profits on the business, why would he sell it today? Well, isn't that the beauty of modern finance produced through Wall Street? To sell it today, the entrepreneur can collect today all his future earnings projected based on the best periods of his business performance, and with that reward, he can move on with his life, rather than be tied up by the business which may turn sourer later and cause him to suffer.
Why would Wall Street care more about growing businesses? Those people who bought out the entrepreneur have an even higher reward outlook than his and would seek higher profit on the investment.
Art Cooper writes:
An example of this currently in the news is Hormel Foods, described in the article "Spam Sales Boost Hormel's Profit" on p B4 of today's WSJ.
The article notes that Hormel's Q3 earnings rose 13%, led by strong growth in products such as Spam and Mexican salsas, continuing a trend of higher YoY earnings. "Even so, rising commodity costs and shoppers' resistance to higher prices are pressuring its profit margins, which could affect its results in future quarters."
HRL's price has been roughly flat for a year.
August 24, 2012 | Leave a Comment
As an island resident we have to worry about hurricanes this time of year. Lots of interesting things about hurricanes but one of the biggest is they are pretty unpredictable looking out a few days/weeks. A look at any "spaghetti" chart will show that the current storm, Isaac, might end up in New Orleans or it might end up in Boston. A pretty wide range. Generally it is best to have some supplies on hand when living in danger zones but to avoid closing the shutters and making amends with the almighty until the storm is right on top of you.
That said, all models seem to predict fairly well in the short term. Has anyone looked into spaghetti models in predicting market movements? Thus far my simple google searches haven't turned up much in the way of the math behind the models. I know some weather predictions involve the Lorenz indicator and elements of chaos theory so perhaps that is a good starting point.
Gibbons Burke comments:
Interesting fact: Isaac in Hebrew means "he laughs" or "he will laugh". Sarah, his mother, laughed when she overheard the prophesy of the three visitors telling Abraham she would bear a child within the year, past the age of childbearing.
Russ Sears writes:
I believe you are looking for Lorenz Equations.
While not my expertise, I think this is best visualized as two circular motions pushing against each other, the pressures, speeds and dynamics of eventual interaction makes the path "chosen" impossible to predict exactly. Often they will "spin" in one direction or the other because a very small tipping point gets rolling and will be opportunistically reinforced.
Others like to illustrate it with the "Lorenzo Water Wheel".
Here is a video illustrating it.
Perhaps the water wheel is a better analogy to the markets, The bulls are pouring money in, the bears are leaking it out and the financial/economy weighs the inertia and gravity to the spin.
July 26, 2012 | Leave a Comment
When falling at more than 75 miles an hour, starting from above 100 feet above the ground off a tree, the custom is to yell "headache". Apparently certain death is imminent. I haven't figured out if it's a courtesy to those with the pine box, or just to get out of the way not to die along side.
A certain pres candidate was telling us that he fell 50 feet from a tree after power gliding and did not know the proper call. He lost 1 1/2 inches immediately and it took him 2 1/2 years to recover. Tore all sorts of vertebrae.
One has been in that situation in the market many times, and now I know what to call out. If you hear me, or as a courtesy you are in that situation, you know what the word means.
Russ Sears writes:
I would suggest that this is akin to arranging the chairs on deck or playing in the orchestra on the Titanic. Its purpose to give your left brain a vacation, through a mundane task so as not to panic. The time for logical analysis has passed. While at the same time giving notice to your right brain to engage in humor, art or intuition to create the highest probability of survival and one last chance to take in the beauty of it all; to go out living.
July 19, 2012 | 2 Comments
Where does one learn about the economics of the farming business. I'm curious if there is a good place to read up on a sort of income statement on farming on a per acre basis (averaged across different crop types and soil grades). I'm curious to understand the economics of the business of farming.
Vince Fulco writes:
King Corn is a short and amusing documentary (found on netflix) which documents two college graduates who decide to return home to their grandparents' town in Iowa. They rent an acre of farmland and attempt to grow corn all the while profiling the inputs and costs. Needless to say with no economies of scale they make a pittance netted mostly from govt programs.
Big River was their second movie documenting the amount of pesticides which go into our food supply and the prevalence of odd cancers in farming families; striking more wives than husbands.
Scott Brooks writes:
I wrote this post back in January of 2008…..so it is very dated, but I think it will give you a good primer on the subject of growing and the economics of corn from a ground level. List member, Mike Ott is a MUCH better resource on this subject, but I think this will give you, at least, a decent idea of what's involved in growing and raising corn.
Russ Sears writes:
While not an expert on the subject, my in-law are crop farmers and my paternal Grandparents rental farmed until they passed.
Much of the individual farmer's income statement depends on the type of agreement from the land use. (Rental, share expenses and crops, debt on land, corporate owned, farming own land etc.)
But I believe Scott posted the basics with perhaps a few notes. Property taxes are a big expense for most farmers. Also profit/losses on the value of the land should be considered. Most farmers are asset rich and "cash poor". Often they take out short term loans on the seed and fertilizer. Plus they often have some leverage or debt on the land. They generally keep this to a minimum so they can withstand some shock and long term downturns. (lessons learned from 70's and 80's) Most farmers budget their living expenses They often put off purchasing equipment and new cars/pickup until a good if not great year. Darwinian nature of the business has left a pretty conservative bunch for the individuals who still farm.
They also sometimes leverage to diversify their holdings investing in stocks and bonds.
The average farm owner is generally above 65. But if not often they take second jobs or have the wife work for health benefits. As independent business health insurance can be very high. Social Security and Medicare are also part of the taxes or part of the income depending on age.
On first reading Kahneman's Thinking: Fast and Slow I believed the only possible reason he could have been so wordy on purpose was because he believed in the "tell it 3 times if you want people to remember" theory of teaching. But upon reflection it seems perhaps it is simply an old man waxing on and on about his glory days. So skip the pages once you got the point.
While a great read for presenting his research, it was not without biases of its own…as the Chair is fond of saying he presented his case too strongly for the meme that has the world in its grip "our purpose in life is to share…". He simply ignored any research that proves "skill" is involved in being "above average" and focused almost exclusively on "reversion to the mean". Or that poorly designed incentives can make matters worse. Or that "greatness" can be proven to have some luck. That is even in some of his examples "the mean" of a group is several standard deviations from the average of the population, but he implies they were simply "lucky".
June 27, 2012 | 6 Comments
I am at a loss why seemingly great athletes — those you would expect to have the keenest kinesthetic awareness — seemingly struggle on the dancefloor (I am not referring to ballroom-type dancing here…..not just shaking around on some club floor). I used to think that they were merely overly-self conscious, and this was causing their seeming stiffness. Yet, these very athletes excel precisely because they do NOT stiffen up and understand perfectly well the necessity of avoiding that, as well as preventing adrenalin surge, or coping with it in beneficial ways.
Peculiarly, the only atheletes-turned-dancers I have seen who can perform the dancing aspect gracefully are those who are boxers or very good standup fighters.
And the more I have watch this, the more evident it has become to me why (this is my hypothesis, which I am seeking feedback on here). A great ballroom dancer, like a great boxer or stand up fighter, has to have his feet under him such that if he were wearing a belt buckle, it would be slightly pointed upwards. In all other sports, be it playing shortstop, returning a tennis serve, a hockey player…..there is a certain, crouched position where the belt buckle is pointed downwards.
Yes, the best boxers, the best standup fighters almost invariably have tremendous footwork, where even their punches come from the balls of their feet (watch a slow right cross from Ali, how the ball of his right foot pivots, the heel up and turning outward, allowing that complete extension through his target). Many of these guys are often even built much like Fred Astaire, light not just in bodyweight, but seemingly light on their feet as well (though, not to the extent of Astaire, who must have been filled half with helium, the man was truly superhuman). Yet, footwork aside, it seems the angle of the belt buckle, in a range of, say, ten degrees, is a hugely discriminating factor in what permits an athlete to go from his game to the dance floor.
Russ Sears adds:
In my opinion, there are at least 2 reasons "great athletes" are not dancers both stemming from your definiton of "great". Most of the highest paid athletes need 2 things extra-ordinary size and extremely high levels of fast twitch mucles.
The size comes at a considerable price to "grace". Extra ordinary increase in growth during teen years happen with increase muscular strength often very awkward years for even more normal sized men. It takes much more to control a large body to make delicate movements. Those needing the speed spend considerable time training for raw speed, to go with that size, not necessarily intricate steps and bends. Those needing delicate touch, likewise spend considerable time to get the hand/arms to move just so.
But perhaps more important is the fast twitch need in most of the highest paying sports leaving the "great" athlete with little endurance. Endurance comes with a more balanced slow twitch combination. A cardio taxing dance last several minutes long.
Dancers have considerable cardiovascular fitness, as do boxers. The middle distance runners I have known often are great dancers and often make great boxers and vice a versa. In the olympics note the events that last 2-5 minutes at a hard pace with no rest and you probably have some great dancers. The longer events suffer the opposite, slow twitchers can't jump but have great endurance but lack the explosive movements ability.
Anecdotally, didn't Apolo Ohno win "Dancing With The Stars" one season?
Duncan Coker writes:
I used to take lessons and compete in some pro/ams back in the 90s in New York, and also got to know a lot of the professionals at that time, mostly British and Russian. Ralph is right about the position of the man's belt buckle as it is quite important. The center helps create a floating style important in ballroom. Also interesting, the term swing as it applies to ballroom dance is not really about 1940s swing dancing. Rather it means to mimic the swing of a pendulum in fox trot and waltz. As the dancers are moving laterally across the floor they are also gliding up and down. Another position technique that was taught was contra body movement (CBM). It means to move the feet and legs in one direction while maintaining contact with a partner in another direction. Most professional couples start dancing in childhood, so the steps and physical attributes are ingrained early. I can see how many of these techniques would be hard to learn by even accomplished athletes in other sports later in life.
Ballroom is a strange and wonderful world. It still amazes me the tv shows are so popular, but I think it is great.
Ralph Vince writes:
Once, in working with a biochemist-turned-programmer, and talking about my pathetically slow running, the Chinaman, the biochemist (who was no runner, not the slightest athletic propensity whatsoever) told me that age, weight, and cellular mitochondria were the limiting factors. The only one I could really change was my weight, in order to get faster.
Now, I don't believe that entirely, because that would mean that whatever training I did only benefited by whatever weight I took off, and clearly there are 02 factors that you can train for, etc. But he did point out that I am not going to cut my average mile time in half — a valid point. He then mentioned that in all creatures, speed is a function of how much mitochondria is in one's cells, with, say, a cheetah having a great deal of it, human beings, in differing degrees, of course, possessing far less.
Now, this has nothing to do with Fred Astaire's ability to beat the living daylight's out of most thugs (I am convinced a man with his feet and coordination could have done that handily, and I say that based on the little thugs I knew in my youth who were physically disposed in similar though far less amazing ways) but I would like to know your take on that given your background in the world of running.
Russ Sears replies:
Despite the popular assertion to the contrary you can not "be anything you want to be." relative to others. No amount of training will get a sprinter to turn into a distance runner and vice versa. I believe it was Flo Jo that after retiring from sprinting tried to become a distance runner. She was very dedicated, hired smart coaches and believed she was going to be great… but never ran a 5k faster than about 21 minutes. Now this is a decent time for the general population. Competitively this would only get her onto most high school girls cross country teams. In most teams even small schools this time would not be the best on the team. In evaluating kids to guide them into the right event to try out for in track in field I have tested for the following.
Sprinters- Fast twitch explosiveness- standing and running vertical jump relative to size. Muscle size relative to strength is important, lean muscles verses bigger more explosive. Bone size is also important.
Stalky - bigger muscles large bones, built for sprinting and short middle distance.
Lanky - Small bones, lean muscles for distance and longer middle distance. Middle distance - repeat 200 meter and 400's times. Distance VO2, max heart rate, and recovery time - Push-up and pull-up counts coordination for most field events - timed box steps up and down in patterns. Weight /Size and arm and leg strength with fairly good fast twitch relative to size for throwing. Small bones but explosive for high jumpers. Pole vaulters - coordination, explosive, stalky, fearlessness- look for trampoline and diving craziness.
You can be good at an event simply by loving it, training for it, have some core athlete talent and being in shape, but to be great you have to have several genetic factors in your favor.
Some of these factors can be changed by type of training, eating and lifestyle while young etc. But you can not completely reverse them by nurture. Most people that run regularly will see their times drop for many years. It takes about 10 years of hard cardio training to fully develop your cardio system. But your body will break down due to training before it could develop someone without the core body type and muscle types into a distance runner.
Peter Saint-Andre writes:
Lessons for traders and investors here? Probably some folks are built for short term trading, others for long-term investing, others for building companies directly, etc…
June 21, 2012 | Leave a Comment
In a recent trip to the Netherlands, I noted the weakness in the Dutch real estate market. This brought back a memory of a speech by Alan Greenspan in Cambridge, referencing a PhD thesis, that a loss on the value of one's home (nest egg) had twice the impact on consumer spending as an equal loss in the stock market (risk capital). According to Behavioral finance, "errors" like this are a natural tendency of people, and hence persist (are not averaged out) by Mr. Market. In principle, a shrewd investor can take advantage of these market inefficiencies.
The problems with Dutch real estate, similar problems in Denmark, not to mention Spain, do not bode well for European consumer behavior to my mind, possibly for years to come. Does anyone have any thoughts or data on this?
Secondly, my hypothesis regarding the origins of the real estate problems in the US (also possibly Europe, Japan?) has to do with the "baby boom", (the overreaction to the loss of good men in WWII.) One definition of the baby "bubble" are people born between 1946 and 1964 (average 1955), which makes the average baby boomers roughly 57 today. My hypothesis goes like this: as the baby boomers retire, or approach retirement, they shed risk assets or assets they are overleveraged. In this case real estate. As this process ends or mitigates, the real estate market should improve, with dramatic consequences for US consumer behavior. (not tremendously original, I know.)
My question in this: Does anyone have any data on the demographics of people shedding assists, particularly real estate, related to retirement? That is, a graph hopefully showing the peak of asset shedding by people in their 50's and 60's?
Thanks in advance for your thoughts, criticisms, or data,
Andrei Kotlov writes:
Two quick remarks (but no data) :
(1) Curtailed consumer spending is good for the economy (current consumption destroys capital; production is [mostly] in anticipation of future consumption).
(2) The U.S. housing bubble was caused by the easy-money policy of the Fed; rather, that policy ensured that *a* bubble would appear; other factors (e.g., acts of Congress) directed the easy money into the housing specifically. What you describe (shedding of real estate by the baby boomers) could explain the *burst* of the bubble—though, in my opinion, the burst occurred primarily because the Fed [temporarily] reversed its easy-money policy.
Jack Tierney writes:
I don't know that your hypotheses will hold up. I agree that Boomers, and more significantly, their parents, will want to shed assets - including homes and equities. I believe Boomers, like current retirees will find it easy to sell their homes (or condos) IF they're willing to take a significant haircut. Despite what real estate cheerleaders might claim, there's no getting around the facts (from the Fed) that between '07 and '10 the average American household experienced a 39% decline in net worth. The following two years have seen no improvement. Traditionally, those most likely (and financially equipped) to purchase a single family home are college-educated professionals. Unlike those of other past generations, these will be populated by graduates who carry significant amounts of debt - and their creditor is the most relentless, and unforgiving, collector imaginable - the Federal government. Since these debts cannot be negotiated down, expunged by death, or bankrupted away, they will be paid down before capital accumulation can begin. As a result, the cohort most likely to support a resurgent real estate market will be, at best, delayed in bringing it about. Even then, there is and will continue to be a contraction in wages. Significantly, the post-Boomer generations (Gen-Xers and Millenials) will be, relatively speaking, financial beggars. We must remember that the technological advances we can't stop raving about came about as all business advances do - to reduce the cost of production…and wages are (or used to be) a big cost of production. Those few who have been able to overcome the "math is difficult" meme and obtain an education (and degree) in a handful of specialty fields will continue to do well…and will become home owners assuming they have also learned to save…a problematic assumption.
Another cohort, which will include a significant number of college grads, will fight for positions that offer something a little better than above average incomes…they may become home owners but their zip codes, like mine, will not be noted for country clubs, cotillions, or Chris Crafts. A similar cohort, but one slightly less fortunate and/or ambitious, will contain a fair representation of graduates from every level, and their lives will be marked by a payday-to-payday narrative. Some in this group will never repay their education loans and either move in with family members or migrate from one transient hotel to another. They will not contribute to a real estate boom or consumer spending. The final group will be composed of the poor - working and otherwise. I have no idea how big it will be, but am sure it will be substantial, it will be urban, and it will be restless. Public housing will be the order of the day but among its residents there will be those who recall the "good old days" when various government sponsored programs were numerous and sufficient. Some will recall the wealth that existed, how quickly and inexplicably it disappeared, and the culprits (real and imagined) who destroyed it. The primary concern of the government, whatever form it may have taken, will be, as it ever is, to maintain docility.
While these developments might well result in "dramatic consequences for US consumer behavior," I doubt we'll ever see a housing market or the level of consumerism like that we experienced following WW II. It not only requires great wealth, but a great concentration of wealth. The kind that exists only when your major competitors have destroyed their manufacturing bases not once, but twice, in three decades - and yours remains unscathed. Under those circumstance you can build homes or automobiles with varying degrees of quality, pay substantial wages, and still have an incredible boom.
Andre Clapp responds:
Alas, I think I agree with you. Looks like we're in for some tough sledding for at least another decade, maybe longer. Not to sound too much like the writer of "Generation X", but I think that the argument can be made that this older generation (including me) has very much "borrowed" or "stolen" from the younger generation. (Pay as you go SS might be an example of this. The high cost of healthcare, the national debt, etc.)
In this sense, I am somewhat sympathetic (often unpopular in financial circles) to the inflationary monetary policies of the Fed and the ECB. Although I agree that printing all this money amounts to "confiscation" of wealth from Savers and bond holders, I think it may be morally justifiable as a politically feasible way to transfer wealth from the older to the younger generations. At least give the younger generation some motivation to work, invest, and take some risk, as opposed to moving in with their parents/grandparents and playing video games all day. I believe we have seen the later in Japan, which to my mind decided to let deflation run its course (and protect the savers and bond holders, which of course are predominantly the older generation.)
What do you think of this?
Also, it is notable that despite the trillions of dollars that have been injected into western economies by the Fed and ECB, it has yet to produce meaningful inflation… Any thoughts on this? Is the psychological impact so great that no amount of monetary easing will produce inflation? Can't push on a string kind of thing?
I couldn't help noticing that the Danish government recently sold bonds at a negative yield.
Andrei Kotlov writes:
Two quick thoughts:
(1) Inflation (money printing) amounts to enriching those who stands by the printing press (the gov't) and confiscation from those who are removed from the printing press, in proportion to their distance. The savers (the older gen) will suffer just as much as the future lenders (the younger gen) who will pay the higher rates.
(2) Money printing has not lead to 'meaningful inflation' *yet* because it has been done concurrently with the naturally-occurring deflation (caused by the contraction of credit).
Gary Rogan writes:
To advocate as "morally justifiable" the despicable activity aiming "to transfer wealth from the older to the younger generations" is itself not morally justifiable, regardless of how much the younger generation is expected to benefit.
Also another reason why this activity hasn't resulted in inflation yet is because the Fed is paying banks significantly higher than the market rate to keep their excess reserves on deposit there. Sooner or later this music will stop, and there will be a flood of inflation that will be declared "unexpected" for months on end, just like the number of unemployment claims has been.
Russ Sears writes:
For a bigger picture that takes finance into the picture look at the census data on home ownership before and after the bubble .
The meal for a life-time I believe is in the anatomy of a bubble contained in the home ownership percentages.
Ownership rate in the US was 63.9% in 1990 with the magic of Mortgage Backed Securities, the Fannie and Freddie programs this was raised to 67.4% by 2000. Then came the push into sub-prime and this was raised to 69.0% by 2004… It hoovered at this unsustainable level a couple years where the greater fool seemed to take over before the dam broke in 2007 with a drop of 0.7% (68.8%/2006 to 68.1%/2007) and the QE fix was in to keep it from continuing the crash and clearing the market. The home ownership in 2010 still stood at 66.9% off 0.5% from 2009. I suspect your conclusions are correct that with the lose of government subsidized financing the ownership rates need to get back to closer to 1990 levels.
However, looking at the numbers it would appear that the older ages have continued to value home ownership.. Those aged 65+ followed a similar path of the overall demographic until recently. (76.3%/1990; 80.4%/2000; 81.1%/2004
With the lower rates they appear to be the ones that currently are taking advantage of them to purchase housing. going from 80.1% in 2008 to 80.5% /2009 and 2010)
This group may very well continue to drop below to the 1990 levels once the rates are not being stimulated.
However, as an actuary well aware of the risk of out living your wealth, I would argue that the home ownership is many elderly household's main hedge against long term inflation. Plus the nostalgia of setting roots and maintaining an inheritance. They would need to be clearly convinced deflation is here to stay before they give up on home ownership.
Gary Rogan writes:
Andre, I'm not sure which intergenerational theft mechanism you mean (one could argue that say Social Security is some for of that type of theft or whatever), but regardless:
Just talking about returning wealth to its rightful owner is communist rhetoric and implies collective punishment for a class of people. There is no justice in making a group of people pay for something they didn't individually undertake. There is no justice in making members of this group pay out of any proportion to how much each of them supposedly "stole". There is no justice in an unelected and unappointed (for this purpose) body extracting this retribution, especially without even a semblance of due process. There is no justice in this body using a totally spurious explanation because it's politically convenient for undertaking this sort of justice.
Of course as a practical matter, this is just theft in order to make the constituent banks whole and to impose taxation by more palatable means mainly to support those in power staying in power. Nobody has any intention helping the younger generation. But to me, justifying collective theft as collective punishment or justice is simply abhorrent.
It is interesting how Doc Rivers got his name. He came to a training camp wearing a Doc J sweat shirt. Ever since, the players perpetually have been calling him doc. I like to give nick names to people. Called wisdom "the Wiz". Called John Normile, "normal" or "Doji". Call Michele "Ms. Increment " Yes. I am "the Chair " because it's sedentary. Called the guy who invented "trading algorithms for NYSE "Mr. Small" because he programmed in Small talk.
On another front, I don't know much about basketball but to me the best player I've ever seen is Durant. He can shoot well from outside or inside, and is very fast. So many of the others can only play well when they're a few feet from the basket like James, or Melo, and when they're forced deep have an average eye, and lose the game by shooting because their team is unlikely to get the rebound. Trading for the trend following reminds me of Melo's 30 feet one on one. The other player I think is second best, is Iso Joe on the Atlanta Hawks who again can do everything. I wish I knew a trader like these two, or could aspire to it myself.
Russ Sears writes:
Of course since I am currently residing in OKC area, I've watch a few games. As a runner what struck me was how good Durant was in game 6 in the third quarter, such patients and confidence when the Spurs had spent their legs in the first half, Durant then took it to them. His endurance began to wane in the 4th, but was still above the Spurs starters. Both coaches in my opinion left their starters in too long after obvious signs of fatigue were showing.
In racing the sign of pending collapse in pace of the opponent is change in their breathing pattern. A runner instinctively learns that this is the time to press the pace on the opponent.This will bring the collapse on before they can strategically slow the pace. If their cardio's exhausted they cannot "kick". Both sides were showing signs of cardio exhaustion. For fast twitch, however, there is more than cardio. A fast twitch athlete has 3 or 4 supreme total explosive efforts before their muscles start showing great decline. (Hence why in jumping events in the Olympics strategy calls for passing until the near the optimal height.) . There were several times the Thunder could have made a statement with a explosive dunk, but settled for a gentle lay-up.
Durant played with the legs of a highly conditioned young man, but the strategic timing of an experienced jumper/racer.
I note Henry Winkler and Fred Thompson touting the merits of reverse mortgages.
Without any facts my gut says they are bad?
Any Specs have any facts to share?
Russ Sears writes:
Those considering this should shop around. The commissions are high and the margins are also. This is especially true if they are not in perfect health, as the actuary tables assume anti-selection. A much better option, for those with family that can afford it, is to have a family member monthly buy a higher percentage of the resale value at time of inheritance.
thanks for sharing with us your 18 years of heartfelt effort. From the twinkle in your eye and the cooing the first time I held you, I could tell you're a fighter with a zest for life. It could be said that your birth was a miracle: twice while still in the womb you picked just the right time and way to alert Dr. Deseay you wanted to live. When things get rough, and you wonder "why", take it from a first time Dad that saw the birth, the twinkle, and the smile over and over; your life is a miracle: Never forget that. You and I never had the big battles so many parents and kids have over their independence; nevertheless, I can tell you yearn to take control over your life. Never feel guilty for wanting this. Nor should you let this responsibility overwhelm you until you cede control just so you don't have to make the tough decisions that will make you who you will become.
Over the next few years there will be plenty of people that will try to replace Mom and Dad. Suitors, bosses, even teachers and preachers will all try to exploit you to make you into something you are not. Some may be trying to enlarge their power, but others are simply passionate and want to mold you into their passions no matter the mismatch. Be true to yourself.
Over the next few years try to discover who that is. Try new things. Take classes, just to explore something. Go places just to meet different people. Take risks. Do not settle just to settle. I know it is tough, sometimes you may not know your major, may not have a job, may not have boyfriend, or may not have a group of friends to hang out with on a weekend and money will be tight. But each of these things is too foundational to pick the wrong ones.
It is scary and disheartening to think you may not be needed or wanted. But never be too afraid of the unknown to quit. When you find yourself without these anchors, then is the times to double down have confidence and invest in you. If it is not working for you, be quick to admit you made a mistake and reverse course.
However, on the other side, once you see both the potential and the real cost and you believe in something or someone and enjoy your work, do not look back. If you decide it is for you, do not trade your responsibility for the thrill of the chase, or to keep dreaming rather than face the harshness of the real world. Neither should you give up because it is too hard or not as easy as you thought.
But most of all trust in yourself when others say you cannot, it is impossible, or that only the lucky "make it" in that world if you really want it and know that you are made for it. The critics maybe right about the luck needed. The critics are always right that effort required would be too monumental if there is no passion. But for the passionate, effort is child's play and sacrifice is a perfect fit for those built for the job.
Perhaps the secret to controlling your universe is believing in others. Call it God or Karma, but "what measure ye mete, it shall be measured to you again". Therefore, look for what others bring to the table, rather than define them by their weaknesses. Look for the good in others.
This is how you find favor with other because this is how they see themselves. They believe what they bring to the table is of the utmost importance. They then can return the favor. Those that do the same for all are those that you should trust, rely on, and bring close. These are the people that will make you prosper and bring you happiness. Recognizing the richness that others bring to your life in return will bring you love. When you look for and believe the good in others only then you can see it and believe it about yourself. Recognizing what you bring to the world, and will then help you find the richness that makes you, "YOU".
My teens say facebook is yesterday–hope the IPO isn't a "fail" as they call things that suck, or do not work.
The stock now could go public at a lower price. Moreover, new uncertainty about the Menlo Park, Cal., company's growth prospects may temper some of the feeding frenzy that was expected to take place on the stock's first day of trading — currently scheduled for May 18.
Craig Mee responds:
Agreed. Looking at explosive movers and shakers like Google, Facebook is a different animal. Google gets the job done, but Facebook is more part of a trend or coolness factor that can be side stepped as quick as the share/message/like buttons allow. What's more, the site, especially the log in page, looks kind of old school. You can buy things, but you can't buy coolness, once you've lost it.
Russell Sears writes:
My daughter says it is because Facebook has been taken over by all the whiners, posting all the time and losers playing games. It seems the only acceptable use is keeping Grandma up to date. Hence if you admit you use it, you are the sucker at the table.
Gary Rogan writes:
In addition to the inherent instability of any high tech company, this one adds the delightful dependence of its success on the what most of its customers think of most/some of its other customers, usually a characteristic associated with trendy fashion retailers and night clubs. Compared to this one, Groupon that made another all-time low today at significantly less than half of its initial trading range is the rock of Gibraltar.
It has always seemed to me that one of the worst and most frequent causes of defeat in basketball is showboating. After being ahead two games ago by 17 points at the end of the third quarter, the Knicks managed to lose to Atlanta. The loss came after a 3 point shot by Novak that the whole bench jumped up to cheer about to Novak's Gallinari like smile of triumph and joy. I say that too many games are lost when one team has a large lead to bear consistent with randomness or lack of serial correlation which some Kahneman like biased researchers playing to the crowd have posited for bastketball. A main cause is showboating but the general problem of letting up is relevant also. "Never let up" is a great motto for market players and basketball players. I tried to insulate myself from this in squash by pretending that the score was reversed against me when I got a good lead in squash. I tried to hold my opponents to straight game losses and under double digits when I played. And to a remarkable extent I was successful at it. I don't ever remember losing a match when I had a big lead, and I remember all my losses. I wish I were as good at not letting up or winning in the markets as I was at squash. I am not one tenth as good. What is the remedy for letting up and showboating in the market? I would say the answer must be quantified. What's the expectation when the market is up by x or more with just y hours to the close. What happens after a inordinate move with a bar? That's a start.
A coach unlike the terrible and ineffective D'Antoni who was such a source of the Knicks losing records, and now that he has been fired is receiving such loving and adulatory treatment by the press, in a syndrome of "don't say bad things about the man who died" was actually encouraging of the showboating. Which coaches are good at rooting out showboating, and good at maintaining leads? What can we learn from them? How could it be applied to markets?
On another front, a reader writes in response to Tim Melvin's great piece about baseball that baseball is dying in the US as the blacks abandoned it for basketball and the kids now abandon it for soccer. He says the baseball diamonds are empty. Is this statement true? Are there any profitable activities based upon that idea? I wonder if it can be generalized to buying stocks that the kids are interested in as opposed to what adults like. My kids are very adept at picking stocks.
T.K Marks adds:
The showboating tedium would appear to be not limited to basketball, but rather a pervasive plague that cuts across all sports. Golf may be the last refuge of sporting decorum. Same for Wimbledon.
Some years ago NFl coach Marty Schottenheimer referred to this trend as the "SportsCenter mentality." Everybody wants to be an ESPN highlight. As such, the objective in many football circles is no longer to wrap one's arms around the ballcarrier to better ensure making the tackle but rather to lead with the shoulder and try to knock the guy into the next zip code. The problem is they're going after a moving target and shoulders however brawny can't grab. Arms can.
"…In 1998, when the Kansas City Chiefs were penalized 15 times in a game, many for taunting, showboating, late hits and every act of unsportsmanlike conduct, their disgusted head coach, Marty Schottenheimer, explained, "It's the 'SportsCenter' mentality."
A cultural anthropologist might say that the devolution of decorum that we see on playing fields is a reflection of shifting social mores that increasingly accommodate an anything-goes, me-me-me collective mindset. It's the ascendance of flamboyance over fundamentals.
It's not a trend that is limited to sports. A friend's mother is an English professor. She once shared with me an observation she had made of her students: Nobody could spell anymore. Even seemed to be oblivious to the 'i before e' thing. Rather, they all went for shock value in their compositions. The implication being that spelling was insufficiently postmodern in their eyes, I guess.
P.S. I may have to re-visit that golf as a redoubt of manners notion. As I type I'm watching The Masters on tv and Tiger Woods just hit an errant shot. He kicked his club, demonstrably pouted, cussed. The whole fairway intemperance package.
Kurt Specht writes:
Fortunately, Tiger is the rare exception and nearly all involved with professional golf do maintain civil decorum. He has been an arrogant ignoramus for many years.
Jay Pasch adds:
This is a gold mine for a trader, and for the bullish chartist to invert the chart once in a while in order to see what the other side has in mind…
An anonymous contributor writes in:
Perhaps the markets equivalent to showboating is market arbitrage, because both have a way of snatching defeat from an apparent victory. Both show disrespect for those on the other side of your performance. Both imply that you are the smartest most talented and your approach is the only side worth considering. The other side is either stupid, without hope of duplicating you or blind to the easy win.
Sometime the common sense of "no free lunch" will help those vulnerable to hubris reject something presented with the actual word "arbitrage". However, if you are vulnerable to hubris of omniscience (including science is complete and has all the answers) or manifest destiny (mystical chosen favor) you still are prone to believe the con man pitching your talent, position and place. You want models or world views that confirm you are right rather than confront where you need improvement. You do not want to look for the true risk reward trade off.
The reason both showboating and "arbitrage" are so dangerous is: it disarms one to the risks, so that you become blind to the risk outside your vantage point. It dismisses the risks that you are the one wrong or the sucker at the table that you are being hustled (see AIG or subprime CDO counterparties to the too big to bring to justice). It makes others hold you in the same contempt you show to the weaker hand… and makes you a target for the bigger fish. It invokes envy. It causes you to seek affirmation rather than constructive criticism, making you prey for those with flowery words. It rejects coaching especially from those "beneath" you. It assumes you have arrived and need not evolve.
Risk is constantly evolving. If there was an underlying attitude that caused the crisis it was that AAA credit was not vulnerable to this evolution.
Russ Sears writes:
Vic, one need not worry too much about baseball's future if one visits small towns in Oklahoma and Texas. What the blacks may have abandoned, the hispanics have filled in. There will still be those most hungry for success ready to fill the city kids place.
35 years ago, in 6th grade, I lived in Glencoe, OK, a town so small that I could walk from one side to the other in 5 minutes. I played 3 sports, baseball, basketball and track. The biggest building was the school gym. The stands would be half full for a 6th grade baseball game. The population would more than double when the high school teams played since the county folks and the visiting team's fans also swarmed the stands on a Friday night.
I went back to visit a couple years ago. The dirt track was now trailer classrooms. The whole town had turned into a trailer park, perhaps tripling the population from 1970s. Glencoe is now the "new" poor, those outside the mainstream media view but growing, looking and waiting for their chance. The town is run down, the houses from the 70s all are run down and trailers surround them, even on the smallest lots. Besides the trailers, the school building are all from the 70s.
However, the baseball diamond is much bigger and better than before. The stands and concession building are much bigger also. I imagine them full on a Friday night in May.
I would suggest that in addition to trusting the stock picks of your kids, you ask farmers and others who travel all over the country their local picks. Ask those where the money is flowing what they see.
When I first started studying stocks and insider trading, I got a cold call from a broker touting a medical stock saying insiders were buying. A little research showed that all the executives got company large loans to buy stock, and the company was in trouble, right before they faced bankruptcy.
Then Indiana's biggest insurance company at the time through rapid acquisition, Conseco, CEO and Board, also seemed to buy just before any big announcement. But again, they got big loans to buy stock right when they got in trouble buying the mobile home lenders. I believe it was Greentree Financials, the first "big" financial failure due subprime 10 years before the crisis of the "big" financials, who were smarter than everybody else.
After these 2 experiences, one wonders, if this is a "hail mary" signal. When the board wants insiders to buy a synthetic call (buying the stock, in effect shorting their bonds by taking a loan), do the stock and their bonds underperform?
Any studies on this?
Henrik Andersson writes:
The firm I work for just launched a product following insider transactions and the track record per insider for Sweden. The product was first back tested. Part of the conclusion for that back test were:
After studying over 140,000 insider transactions over the past 12 years in Sweden, we conclude that following insiders leads to excess returns on average, confirming the results of numerous academic studies. However, not all insiders were created equally: some company insiders have a much higher "hit ratio". Our analysis also confirms the limited value of sell transactions for generating excess returns on an individual stock basis, although the volume of insider selling on aggregate can be a useful alarm bell for market moves. Our analysis of Swedish insider transactions shows that insiders have on average earned an excess return on share purchases of 3.2%, 5.5% and 13.3% for 3, 6 and 12-month holding periods respectively. Insider purchases outperform the market 55% of the time, but there are large deviations in this "hit ratio" by company.
The log normal distribution of the returns of the insiders look normal but with the average return beating the market.
March 25, 2012 | 1 Comment
Keep it simple.
The Ideal seldom,
All at once.
Sushil Kedia writes:
My 2 cents:
1. A reward can only come from change.
2. Change, though is the only constant, its expectations are never across people or time.
3. Hence, uncertainty of change only allows for trade to occur. If all are certain ever of the amount and time required for change, prices will only jump and no trade will happen and hence no profits possible.
4. Risk thus is a twin-sister of rewards.
5. No Risk = No Reward.
February 29, 2012 | Leave a Comment
Number 1 is never to get in over your head. Not having staying power will prevent you from reaping the benefits that occur on those small number of businesses you own that need just a little bit more before striking the gusher.
Number 2 is never under any circumstances accept an offer out of the clear blue sky for your share of the business that seemingly is good, but where the party offering you the buyout knows much more than you do. I have lost millions on many occasions by accepting a quick profit in a deal where it turned out if I waited a year or two or three, I would have realized a tremendous windfall.
Number 3 is not to mix romance with business. Romance should come out of business not business out of romance. The romantic aspect will cause a strain and make you look foolish too all your colleagues.
Number 4 is not to have 3 person partnerships as too many coalitions can form, and you will be involved in diplomacy rather than business.
Number 5 is to keep your business consistent with the idea that has the world in its grip. Give your customers what they want, and give returns and the customer is always right.
Number 6 is to be sure that you are aligned with the forces in Washington that control so much of life these days, and have so much in perks and profits to give to their cronies.
Number 7 is to associate yourself with good partners, and good friends, and good employees whose loyalty goes beyond the dollar or the clock. An ounce of loyalty and integrity is worth more than a pound of immediate profits. When the going gets tough, and it always does in business, you need to have the loyal ones. Certain groups and certain belief systems are aphoristic and proverbial for their disloyalty and tendency to deceit and they should be avoided.
Number 8 is to always remember that when dealing with a family business, the loyalty of the family members is to themselves but not to you. The worst short term frauds and cons, and some of the worst long term cons, I have been victimized in had a father and son working in concert to deceive you into giving them your chips.
Number 9 is to associate yourself with people that have a record of success in their family, previous career, or athletics. Those who tend to fail in one thing will bring you down in the other.
Number 10 is to work hard and keep good records so that you will learn from your mistakes and be able to jump in with full force on the good opportunities when they occur. Keep a reserve for such. I know there are many more. And some of mine aren't sharp enough. I tried to memorialize business tips that are directly applicable to markets, and number 2 for example can be quantified for very good reward to risk.
Which ones would you correct and how would you add to this list with market implication?
Russ Sears adds:
11. Be aware of the competition, learn from them and have a strategy to compete. Perhaps the reason athletes do well is because they are aware of the competition and develop a niche or strategy to beat or compete with them. Likewise for successful family, there are few things more powerful and motivational than common goals and team-work within a clear framework for utilizing each individuals diverse unique talents and self interest. A successful family man has shown that he is capable of uniting such a competitive group.
The question everybody asks but is not willing to answer is "why did nobody recognize Jeremy Lin's talent until it was obvious?"
Well a basketball counter did:
However, the obvious answer is prejudice. Not just racial prejudice, that would be too easy and would let the NBA, NCAA coaches and the media off too easy. These groups have learned to destroy racial stereotypes and marginalization.
There is a bigger prejudice that seems to be ignored. If you do not need others to help you but can lift yourself up by your own bootstraps, often those in the business to help, colleges, coaches, professors, and the media do not want to help you.
Jeremy was smart, male, Asian, had a close supportive family, and was a person of strong faith and beliefs. He was going to make it, with or without basketball.
I believe much of the mystery of why people believe, what to an outsider appear to be crazy things, is explained by considering the Amish.
For the Amish, you either chose to believe and live like the community tells you to, or you are ostracized by your family and your community. While most modern Christians and Jews do not usually go to that negative extreme, it is still a statement of trust and a heavy reliance on your family and your family's community to be a person of faith.
They don't trust or rely on the establishment, the government and experts for answers. They believe in the individual rather than making the individual small to build the system up.
Perhaps nobody wanted to take a chance on him because it is obvious that he made himself… not some coach or some college minority scholarship program. Nor was it because he was casting his family aside to follow some enlightened professor's political agenda. The reason nobody saw Jeremy Lin was because nobody was going to get the credit for making him… except himself.
T.K Marks writes:
Meanwhile, over there Milan way, the cognoscenti are apparently are asking the same of "Il Baffo" — The Mustache."
Previous to this Continental information I had always thought that he was just a guy that didn't coach a whole lot of defense. The John Wayne thing was lost on my Stateside ways.
"If you are remaking a classic Western, say Stagecoach or The Wild Bunch, how do you NOT cast Mike D'Antoni as Sheriff? That 'stache!!!" — Miles C.
"It truly is majestic. (I like this old ode by Rob Peterson.) I would be proud as an American to watch D'Antoni draw pistols while on horseback in Cheyenne.
"However, you have to be careful not to start typecasting the Knicks coach as a pure Westerns guy, because then you're missing out on one of the best things about him: his international flava.
"D'Antoni remains a beloved hoops figure in Italy, where he played for most of the '80s and won four league titles, all while sporting the same duster (in cut, if not color) that remains today. Marc Berman wrote in the New York Post last season that D'Antoni is still referred to in Milan as "Il Baffo" — The Mustache. Or, says Google Translate, The Whisker, which I think we can all agree is superior. "Contento per Lin, ma sopratutto per il baffo … il tanto vituperato mike d'antoni," wrote one commenter, named Luigi, on an Italian basketball blog after the Knicks beat the Sacramento Kings last week. Translated roughly, that meant: "Happy for Lin, but especially for the much-maligned mustache … Mike D'Antoni."
On that, Luigi and I are speaking the same language…"
Aubrey learned a good lesson today. I took him to buy ticket scalped to the Knicks/Lakers game at 5 pm yesterday. Game starting at 7 pm. Our first con man insisted on the street that tickets were 400 a piece but we should be very careful because there were disreputable people selling tickets. When I told him I only had 400 bucks, he introduced us to one of his colleagues who pointed to the pizza joint north east and told us to wait there and he would see what he could do. He then came back and told us, "I have to tell you and repeat that these tickets are for the third upper level. Is that okay?". I appreciated his honesty and turned over the 400. When I looked at at he tickets when Aubrey said "let's go to our seats" I noticed that they were for a Bucks game that had transpired 2 weeks prior. I went to look for him on the corner but he and his accomplice had disappeared. I felt it was a great lesson for Aubrey that I wish I had learned from my dad many years before as it would have saved me tens of big. I believe the lesson has enormous market implications and I will test a few things in its honor.
What I liked most about the con was the attempt to show their honesty by pretending to be super scrupulous in telling me that they weren't giving me the best tickets. I guess this is like the broker who tells you that most customers lose. Or the market that tells you that you're selling below the previous high et al.
T.K Marks writes:
Many years ago I fell for a similar switching con, one perpetrated by a deft band of street entrepreneurs.
It happened at the end of the day as I made my way to the E train entrance in the World Trade Center. Amidst the rush hour bustle were two guys with two cartons from which they were purportedly selling phone answering machines for 10 bucks apiece, a bargain price at the time. Being familiar with the wily ways of the City I would ordinarily be somewhat circumspect about these type of retail circumstances, but my fears were allayed by the fact that the things were in official looking boxes, each sealed in shrink-wrapped plastic. But the thing that really sold me on the deal was the weight of the box — It clearly wasn't empty and in fact appeared to weigh almost exactly what a phone answering would.
So I bought the thing and got on the subway.
Upon reaching my apartment I got a knife, cut through the plastic wrapping, and opened the box.
Inside, gingerly swathed in a cushion of some Chinese newspaper, was a brick.
It wasn't even a new brick, it was an old brick.
Rather than get furious with the situation I just sat there and smiled wanly, admittedly impressed with the creative lengths the "retailers' how gone to to pull this routine off. They had picked the right place, the right time of day, somehow came up with the real boxes, and then topped it all off with the plastic shrink-wrapping gimmick so that none of the customers could inspect the goods right on the spot. Balanchine couldn't have choreographed this ballet any better.
After proper reflection though, I learned a little lesson though. Given that the store price for these things at the time was about $60, I should have realized that at10 bucks, those street guys were selling the stuff too low.
One should always be wary about buying anything offered beneath the bid.
Russ Sears writes:
Scalping tickets is legal in Indiana (at least it was when I lived there) and therefore apparently much safer and honest transactions more likely to occur. Sellers often sell in front of the police to insure honesty and safety for both sides. Family guys will routinely offer to sell a ticket for you if you cannot make it to a big game at Purdue or IU. Not sure if this has changed in Indianapolis due to the Final Four and Super Bowl.
Alston Mabry writes:
I would say that asking you the question whether upper-level seats are okay is not so much to demonstrate honesty as it is to control your attention. I think a critical part of any con is to control the mark's attention and direct it away from the incriminating part of the trick. As I understand it, this is how good magicians work, too.
Last September 30th, I was highly critical of a fellow spec (no need to name names) who, amidst the S&P downgrade, the ECRI recession call , and a volatile and nasty stock market swoon wrote: "None the less I moved a large part of my 401 K to cash, and the rest in safer stocks today, giving me more than half in cash. This is as conservative a position I have been at including the 2008-2009 period. " With 20:20 hindsight, we should note that this fellow sold the "exact low" — a statistically improbable feat … comparable only with buying the exact low in natgas last week. He never wrote to us about if/when he became less conservative. One presumes that he continues to justify his decision with some rationalization like: "The risks were just too great to ignore." Or "I couldn't take the pain." Or "My wife would never forgive me if I lost everything."
As I wrote at that time, I thought that there is always a risk of things getting worse, but that I was nibbling into weakness — because my disciplined analysis (which has worked for decades) gave the most probable 3-5 year return of high single digits…and that was sufficient grounds to be adding to exposure — not reducing exposure. I'm not giving away any trade secrets when I note that different asset classes behave differently, and my willingness to nibble at stocks during last summer's swoon is not inconsistent with my unwillingness to aggressively buy natural gas futures at its recent 10-year low prices. Now that Mr. Market has risen a cool 21% — and the Dow Jones is back to it's early 2008 levels, I would bless and compliment anyone who wrote that they were thinking about taking some chips off the table — in large measure because the most probable 3-5 year return in the S&P is back towards the low single digits…and there is considerably less palpable fear; there is little or no value in US fixed income; and European headlines are currently in abeyance. I have no clue whether the next 10% will be up or down — but if it's up (and occurs in the next month or two), I'll be taking some chips off the table too. Everyone makes mistakes. Only fools make the exact same mistake twice. Learn from your mistakes, and you'll be a better trader and a better person too.
A Repentant Man Who Did Not Use a Cane writes in:
I will own this mistake. I have learned from it.
I have thought of that post often, and my macro call's results have been worse than you infer: Because of a new process for transfers, I did not complete the transaction on the 30th. I was not aware of it until Monday, I did not get my confirm and the transaction actually was completed at the close of the 4th.
The S&P was 1131.42, 1099.23 and 1123.95 respectively on those days.
Rather than tell how my account has performed since then let me tell what I believe I learned.
Early on in my history of on this list, I told my one exception to the cane rule:
"When there is a liquidity crisis all bets are off". This worked during the 08 meltdown. I suffered some pretty big hits, but there were more coming once the banks were begging for cash after Lehman. However, it did not work in September because there was no crisis. Being unleveraged I should have stuck closely to the rule, I incorrectly believed that I could have saved a lot of power by anticipating the crisis rather than getting out once it happened. Now, I still believe that if you are a leveraged trader, not going all in with a liquidity crisis forecasted is a prudent thing to do. You may miss a big gain, but your chances of blowing up has increased beyond what is predictable by the historical numbers. If you want to turn to the scientific method during these periods, it would appear that there is significant parallel to what can happen in the chaos of population growth. That is if one resource is depleted you must adapt rather than use the same old tricks.
Now the converse side of the liquidity crisis rule is once the creators of money flood the market with liquidity, then this is the time to pull out the canes again.
I will leave it the everyone to shred this or to educate me further…before the market does.
Gary Rogan writes:
Rocky, the point about selling low seems pretty clear. Are you saying though that you have some evidence that when the expected return falls below low single digits one should "take some chips off the table"? Clearly both points are of the "is motherhood good? is apple pie good?" variety, especially the first one, but much as many people recommend buying low, a lot fewer recommend "going to cash" when the Fed model or whatever is pointing to low expected returns for their core portfolio, if that's what you are talking about.
January 7, 2012 | Leave a Comment
By now you have probably read the Pulitzer prize winning Washington Post article about violinist Joshua Bell performing in the D.C subway.
You have to love the Posties; if they can find a way to diminish and demean their own subscribers, they go for it - because they know that their newspaper can only continue to be the font of wisdom as long as the civil servants believe they have to read it each morning.
Playing Bach in a subway station is like playing baseball indoors; all the skill in the world can't make it anything but a nuisance.
P.S. Bell's virtuosity is unchallengable; his musicianship, like Midori's, so dreadfully earnest that, of course, it gets an A+ from the Wurlitzers of record and requires an audience full of schoolies full of superior appreciation.
Kim Zussman writes:
Aesthetics and taste are subjective and subject to presentation. Examples include statistical inconsistency in rating fine wine and celebrities out of context. When you meet so-called "knock out" actresses in person, more often the surprise is disappointment.
Russ Sears writes:
I am in the middle of reading "Thinking Fast and Slow" by Daniel Kahneman. It tries to describe what psychologist "know" about how intuition (fast thinking) and analysis (slow thinking) work and work together. I will try to give a more complete report once I am finished with it.
However, briefly it mainly describes how thinking creates biases, while at the same time tries to show respect and analyze how amazing "thinking" is.
One of the biases: it is clear most people underestimate the persuasiveness of their surrounding to their effect on their mood, judgment and decision making with even subtle unperceived differences he calls "priming". Such things as a poster with big eyes in the room with a "honor box" for coffee greatly increases the amount put in the box. And a forced smile creates happier people much later.
In the intro- he implied that his main criticism has been the of focusing on the biases rather than the strengths of "thinking", However, so far my main criticism is his over generalizations, and insistence that these studies prove "we" (all of us) are victims of these biases. And so far the book seem to imply that only through analysis (by such studies) can these be recognized and "we" overcome them. Yet, I would suggest that many of the more successful and happy people's "edge" comes from intuitively having perceived many of these biases early on in their lives and having made adjustments to offset them…without perhaps knowing the "science" behind "why".
Such are the people that stopped for the music in the subway station. Even though primed to ignore it. Yet while he insist that "all" are victims of specific biases. Their is perhaps in total evidence that we all accept, the possibility of biases for the power of thinking. But it is natural for life to perceive that they are the superior different one in overcoming these biases. The violinist show many think they would stop and listen, but few actually do.
Even so, the book thinking fast and slow has given me much to think about, and I would recommend it to all.
Dan Grossman writes:
As a former violinist, I had enjoyed the You Tube video and the seeming fact Bell would play incognito in the subway. But I hadn't realized it was a put-up job by the Washington Post.
It's like all those Kahneman and Tversky experiments everyone is so excited about to show there's no rational man that economics is based on, where students play games with small amounts of money given to them.Contrary to that famous fairness experiment, if the student in the real world were negotiating to divide $1 million dollars of real money and he had the choice of getting 10% ($100,000) or nothing, while the other player got 90%, he would take the $100,000.
Victor Niederhoffer adds:
One would add that when Bell plays, his body movements are very poetic and add immeasurably to the sense of music of the audience. Presumably because this was a set up job similar to what Prof Phil pointed out vis a vis the tag team of beggars and homeless brought in to keep man small, and the chair to his credit first brought to the attention of the list vis a vis The Port Authority in New York, which is always laden with the beggars and homeless to keep man small, a la Ayn Rand's essay on Victor Hugo's The Compafriros, the maimed in Spain raised to show how bad the lot of some people can be relative to the feudal existence of the masses, one can assume that Joshua did not make those body movements and twists and turns that lets the audience know he is really making music, so that it would be more likely that the Wash Post could prove the point that no one would notice. 31 bucks on the other hand seems pretty good considering the lack of charity in workers in the beltway who are living off the fruit of other peoples labor.
A little boy says, "Guess what I'm thinking?". I say "when are we going to play monkey in the middle." The little boy says, "No. I'm thinking of when I am going to be a millionaire?". I ask him when he thinks that will be? He says, "maybe when I'm 10 or 12."
Anatoly Veltman writes:
1. Can't be sure (but the way a few trillion ballooned to 14 trillion deficit), everyone may be a millionaire by then.
2. Can't be sure which prof. on my first day in Business School said: general goals (like becoming rich) don't get one there. It is a step-ladder plan of how to get there that may.
3. Can't be sure of precise spelling after all these years (was it Sir Brian Bixley?), but he introduced "marginal utility" to my Microeconomics 101 audience in an entertaining fashion of "villas at the cote d'azur" vs hamburgers. He further confided that his goal in life was to die with his debt maximized! I pray he hasn't delivered just yet — and is alive and well.
4. Can be sure of one thing. He, of all the lucky kids, will well receive his early lesson: The richest are not the people who have the most. They are the people who need the least.
Kim Zussman adds:
From Greg Mankiw
"De Gustibus non est Taxandum"
Bryan Caplan quotes a passage from Daniel Kahneman's Thinking, Fast and Slow (which I have not read, but plan to):A large-scale study of the impact of higher education… revealed striking evidence of the lifelong effects of the goals that young people set for themselves. The relevant data were drawn from questionnaires collected in 1995-1997 from approximately 12,000 people who had started their higher education in elite schools in 1976. When they were 17 or 18, the participants had filled out a questionnaire in which they rated the goal of "being very well-off financially" on a 4-point scale ranging from "not important" to "essential."…Goals make a large difference. Nineteen years after they stated their financial aspirations, many of the people who wanted a high income had achieved it. Among the 597 physicians and other medical professionals in the sample, for example, each additional point on the money-importance scale was associated with an increment of over $14,000 of job income in 1995 dollars!In other words, one reason that people differ in their incomes is that some people care more about having a high income than others.
Russ Sears writes:
For kids, both money and numbers are largely abstractions. I would suggest that one of the important lessons a parent is to give to kids is to understand how money relates to the reality of "being very well off financially" or goals they set in general. From what I have observed most parents do not tie the kids life goals into what financial steps it takes to get there. While a young kid, parents want to teach their kids not to worry about money, that it is their responsibility to take care of them and supply their needs and wants. Both the epidemic now the norm of assumed "adultlescence" of young 20 somethings (why else would 26 year old need to still be on Mom and Dad's health insurance) and the now common "failure to launch" of young adults suggest that many parents are not doing their kids any favors by perpetuating this when their kids are in their teens.
I would suggest that parents talk about what is expected of the teen starting to go to college, and give a dollar figure to both the profession and life styles young teens and kids talk about when they talk about what they want to do when they "grow-up"; besides just encouraging them to dream and share these dreams.
Here's a good article listing 12 things that happy people do differently than everybody else. I don't agree with everything on the list and I would add a few anecdotal things points. I wonder if the we could compile a complete list of things happy people do differently. I'll bet there's more than 12 things, probably closer to 100.
Russ Sears writes:
Perhaps top on my list of New Years resolutions this year is to learn to enjoy effort both intellectually and physically. I believe this will perfect several of the items on the list… including 1. Take care of your body (and mind). Practice "Flow" 2. Savor Life's Joys (by practicing "Living") 3. Setting goals 4. Develop coping skills.
All these are achieved mainly by loving the challenges of effort. But perhaps more importantly, this will help you maximize the resources you are given.
This is the key to feeling good about yourself and overcoming the fears that turn into opportunities.
I would add to the list: "Learn to guard and value money for the freedom and potential opportunities it can bring to your and your families life".
After looking at some Fama French data it would seem to me that Value tends to outperform in periods where the Fed's monetary policy is in disarray. [web site ]
The inflation of 1970-1984 seemed to play into the hands of W. Buffett, whose strategy could perhaps be best defined as buying companies that could raise the cost of goods to the public. Often he was right that there was much less competitive pressure for price than the company leaders had come to believe, perhaps a misperception that evolved through territorial battles that were basically over but still being fought in the minds of these executives.
Now we are in a period of deflation, where feds are trying to prop housing prices up, to save the TBTF banks. It would seem that in such a risk adverse environment, "value" would again out perform growth. But what is the "new value" proposition that will put value companies strategy ahead of their peers?
One thought is that it is high cash with strategy of maximizing high intangible assets (people/ideas).
Have you seen this article about the top 5 regrets of the dying? It is a must read.
Gary Rogan writes:
I really liked all of them, except based on everything that I know I disagree with the statement that "happiness is a choice". Irrational fears are not a choice, depression is not a choice, and neither is happiness.
Gibbons Burke writes:
Well, happiness is dependent on one's attitude, and in many cases, you can choose, control or direct your attitude.
My theory is unhappiness and depression happen when reality does not live up to one's expectations of what life is "supposed" to be like. I think the key to happiness is letting go of those expectations. That action at least is within an individuals purview and control. There is an old Zen maxim: If you are not happy in the here and now, you never will be.
Russ Sears adds:
I think most irrational fears and depression stem from the unintended consequences of one's choices or often, the lack of decisions, such as little or no exercise. However, I believe many of these choices are made when we are children, and we do not fully understand the consequences. Many of these bad choices may be taught often though example by adults or sometimes it is just one's unproductive coping methods that are simply not countered with productive coping methods by the adults in their lives. I think some people are more prone to fall into these ruts, but most of these ruts are dug none the less.
Jim Sogi writes:
The regrets are perhaps easily said on the deathbed but implementing these choices in life is very difficult. Many can not afford the luxury of such choices. When there is no financial security hard work is a necessity. Such regrets are not much different than daydreams such as, oh I wish I could live in Hawaii and surf everyday. The fact of the matter is that the grass always seems greener on the other side. Speak to the lifestyle guys in their old age. Will they say I wish I worked harder and had a career and made more meaning of life than being a ski bum or surf bum?
Gary Rogan responds:
What you say is true about the effects of exercise. But that's just one of many factors that are biochemical in nature. Pre-natal environment, genetics, and related chemical balances and imbalances are highly important in the subjective perception of the level of happiness. There are proteins in your brain that effect how the levels of happiness-inducing hormones and neurotransmitters are regulated and there is nothing you can do about it without a major medical intervention. Certainly some choices that people make affect their eventual subjective perceptions through the resultant stresses and satisfying achievements in their lives, so the choice part of it can clearly be argued. My main point was that by the time the person is an adult, their disposition is as good as inherited. They can vary the levels of subjective perception of happiness around that level through their actions, but they are still stuck with the range, mostly through no fault or choice of their own.
Since a few literally quotations on the subject have been posted, let me end with the quote from William Blake that was used before the chapter on the biological basis of personality I recently read:
Every Night & every Morn
Some to Misery are Born.
Every Morn & every Night
Some are Born to sweet Delight.
Ken Drees writes in:
I believe that you must put effort towards a goal and that exercise in itself begets a reward that bends toward happiness. It's the journey, not the end result. You must cultivate to grow. A perfectly plowed field left untended grows weeds–the pull is down if nothing is done.
Russ Sears adds:
It has been my experience with helping others put exercise into their lives that few teens and young adults have reached such a narrow range that they cannot achieve happiness in their lives. This would include people that have been abused and people that have a natural dispensation to anxiety. Their "range" increases often well beyond what we are currently capable of achieving with "major medical intervention". As we age however our capacity to exercise decreases. While the effects of exercise can still be remarkable; they too are limited by the accelerated decay due to unhappiness within an older body's capacity. Allowing time for our bodies is an art. Art that can bring the delights of youth back to the old and a understanding of the content happiness of a disciplined life to the young.
Peter Saint-Andre replies:
Yes, hard work is often a necessity. But hard work does not prevent one from pursuing other priorities in parallel (writing, music, athletics, investing, whatever you're interested in). Very few people in America have absolutely no leisure time — in fact they have a lot more leisure time than our forebears, but they waste it on television and Facebook and other worthless activities.
Between working 100 hours a week (which few do) and being a ski bum (which few also do) there lies the vast majority of people. Too many of them have ample opportunity to bring forth some of the songs inside them, but instead they fritter their time away and thus end up leading lives of quiet desperation.
It does not need to be so.
Dan Grossman adds:
Jim Sogi has a good point. The deathbed regret that one didn't spend more time with one's family is frequently an unrealistic cliche, similar to fired high level executives expressing the same sentimental goal.
The fact is that being good at family life is a talent not everyone has. And family life can be difficult, messy and not easy to make progress with. Which is perhaps one of the reasons more women these days prefer to have jobs rather than deal all day with family.
Being honest or at least more realistic on their deathbeds, some people should perhaps be saying "I wish I had spent more time building my company."
Rocky Humbert comments:
I feel compelled to note that this discussion about deathbed regrets has been largely ego-centric (from the viewpoint of the bed's occupant) — rather than the perspective of those surrounding the deathbed. I've walked through many a cemetery, (including the storied Kensico Cemetery) and note the preponderance of epitaphs that read: "Loving Husband,"; "Devoted Father," ; "Devoted Mother," and the absence of any tombstones that read: "King of Banking" or "Money Talks: But Not From the Grave."
Notably, Ayn Rand's tombstone in Kensico is devoid of any comments — bearing just her year of birth and death. (She is, however, buried next to her husband.)
In discussing this with my daughter (who recently acquired her driver's license/learning permit), I shared with her the ONLY memory of my high school driver's ed class. (The lesson was taught in the style of an epitaph.):
"Here lies the body of Otis Day.
He died defending his right of way.
He was right; dead right; as he drove along.
But now he's just as dead, as if he'd been wrong."
Kim Zussman writes:
Is an approach of future regret-minimization equivalent to risk-aversion?
Workaholic dads have something to show for their life efforts that Mr. Moms don't, and vice-versa.
If so, perhaps the only free epithet is to diversify devotions — at the expense of reduced expectation of making a big mark on the world or your family.
December 12, 2011 | Leave a Comment
I have recently found myself in a somewhat unfamiliar environment. I find myself being around people who live on the periphery of society to whom honesty and integrity are subjective whims, used only when they are of benefit to themselves.
I am continually amazed by the waste of intellect that I see around me everyday. Obviously smart people with a major character flaw that causes them to consistently fail or, at the very least, underachieve.
I watch as those around me, directly and indirectly, waste their potential because there is something inside of them that compels them to take the harder path. And let's be honest, it's harder to be a liar, a con man, a gossip, and a back stabber than it is be a man of good character who treats others they way they want to be treated.
I am amazed every day when obviously smart people make incredibly horribly stupid choices. Choices that may, in the moment, give short term satisfaction, but long term become an anchor around their neck dragging them further and further down. I find myself these days speaking to my kids more and more about the twin virtues of honesty and integrity and applying it to their lives. I also find myself speaking with them about protecting themselves against the less honorable people who infect our world.
One of my children wanted to know why people are dishonest and why they lie. The best I could do was explain to her what I've come to believe. The reason that liars lie is because they're liars. The reason that cheaters cheat, is because they're cheaters. The reason that thieves steal is because they're thieves. The reason that the scorpion stung the frog is really very simple: It's his nature.
We are going to watch this short video at our next family home evening. It not only discusses honesty, but it shows the courage needed to stand up to the dishonesty that surrounds us. I thought the group might enjoy it.
Russ Sears elaborates:
Much of it has to do with their time frame and vision of sight and their view of other.s Lying is a way to maximize the short term gain. Lying also the best way to maximize your gain if everybody around you is expected to lie. However, honesty and reputation take time to build but maximize the long term "happiness".
Think of it in terms of the prisoners dilemma. If it's a one time thing the best option is to rat on your friend and give info to the police. However, if it is a reoccurring event the optimal choose is to stick together and hope they return the favor. That is unless your partners continually rat on you first, then you become the narc.
That is, honesty is the best policy in the long run only if you hang out with those that return the favor. Honest people will be able to cooperate, hence get much more done. But if you expect that those others are going to be lying to you, you should return in kind.
Think of negotiating with a car dealer. You don't tell him your wife must have that car. And he tells you 3 or 4 "best" offers. But once the contracts signed, honesty again is the best policy.
To what extent can the concept of epidemics be useful in considering the performance of individual stocks? The key variables being the number of infected, the chances that a person with a disease will have contact with the next, and the chances that once a contact occurs that the disease will be transmitted with its consequences, and the time to incubate once contact is made, and finally the chances of becoming immune once contacted. The comparable things would be a product that good or bad in the case of that notorious company that's caused such damage, the chance the good product will be noted and passed on by a customer, the chance that the product will be bought by the next customer, et al.
Alston Mabry writes:
Here is a nice brief explanation of epidemic waves.
Gary Rogan writes:
To be thought of as an epidemic, the company should have a ground-breaking new product and, preferably but not at all necessarily, itself be relatively new. It helps if the product appeals to young people, it also helps if there is a social aspect to the product, either in the form of communications, fashion, status. The vast majority of such companies are either in the technology or fashion business, with most of the rest in some sort of end-consumer business. Most companies don't seem to fit any of these descriptions. They grow or fail by finessing their business or strategy without any type of sudden dramatic growth.
Russ Sears writes:
It would appear to me that any attempt to consider how infections spread within the financial world should start with the investor, and their attempt to pick the strongest, shun and avoid the infected, and attempts to acquire herd immunity by grouping with those who appear to have a natural immunity. Any "epidemic" to an individual stock, sector of stocks, or even market often seems to be a meme caught by the investor, creating the sickness of fear, and damaging the stock.
December 2, 2011 | Leave a Comment
Vic's recent ideas on "Ten problems with nickel and diming" are similar to my recent thoughts on optimizing your giving. The psychology of gift giving suggest that gifts are given to strengthen relationships. Here are a few thoughts I have had recently on how to maximize the return on your gift giving this season:
First: Being generous is a signal that you value the other person and would like to know them better. For those wanting to signal romantic interest this season is an opportunity not to miss. I have thought that women have the harder time finding a partner, as the male simply needs look for a kind, patient generous open heart to be a good mother for his children. But the female looks for a balance between aggressive competitiveness and generosity. Signals that he is capable of both protection of self interest and signals of valuing close relationships. A man that understands the need to display both sides will be well ahead of the vast majority of his rivals. And the female that see the need for both will neither overvalue the myth of the need to "feminize" men nor undervalue their self esteem and fall for a "bad boy" that is abusive.
1. Those looking for partners should spread many small gifts around. As a shy, scrawny 16 year old perhaps my best move was to give several hand carved key chains to girls I was interested in… I still get complements from those girls when I run into them.
2. For those in a committed relationship. Remember that your gift is a signal of how you see the relationship as well as a re-commitment to it. Giving somethingthat the partner will use often is great for this. Buying something sentimental and of fine quality also gives you points.
3. Personal giving helps us understand the impulse to give. The secret to loyalty in many open source business, is the partnership instinct with the giver and the receiver of a service. Showing good examples of parental gifting between each parent is a great lesson for the kids of why and how to optimize the impulse to give.
If you want to get credit for doing anything, take a page out of the service industries mantra: Attitude is everything. Joyful, playfulness is a must in giving.
4. Wrapping is an important way to personalize and adding a personal note is a great way to show you care.
5. Try to give the gift in person if you can. Smile and add a personal comment after it is given. Don't neglect this. If many gifts are given at once, this can be in form of a side comment, note or even a phone call.
6. If gift cards are used or gifts are mailed for those far away, it is even more important not to forget to actually phone them. This is one time that texting is not an imposition. Checking on a gift is a great excuse to renew a friendship.
7. When giving a gift to a child, talking with their parents prior to buying it shows that you value their efforts and place in their child's life. Spending time with the child with the gift shows both that you care for them. Joyful, personal time together is almost always the highest gift to a child.
8. The gift of listening is also highly valued from the elderly and those no longer in your daily routine.
Charity no matter your beliefs, is a good way to expand your world and a chance to learn the lessons of those less fortunate than you. Some of those lessons are governmental injustices, some personal bad decisions and some are lessons of simply bad luck. These harsh life lessons are much better to learn from others than having to live them yourself.
9. A kid befriending an addict and seeing the sight of many addicts and self inflicted poor will erase the medias and movies romanticizing the dangers and life of a druggie and legends of victimhood.
10. Giving to a world wide organization can give you a reason to understand a culture and place beyond the ordinary path and travel.
11. Giving to children can establish a strong bond with the future. It is a nice way to see beyond your past.
12. Learning the diversity of the individual stories make clear the moral bankruptcy of a sterile governmental inforced "safety net" .
I'm noticing that gasoline is below $3.00 here in OKC but oil is up.
According to Yahoo, the oil ETF has gone up +9.7% since start of Sept. While the USA gasoline (UGA etf) has gone down -9.5%.
With oil as the x and intercept set to zero, the daily slope is 83.5% with an R2 of 78% (UGA only goes to Feb. of 2008) Running a scatter diagram, with oil on the X axis, the recent moves seem to be on bottom right hand edge. It does appear the oil will drop with gasoline rising with greater differences. But this the reverse moves are not usually this large.
Is this due to fear in oil regions, but too much current supply?
This is good new for those driving this Holiday. But is there a Thanksgiving leftover meal here? Ideas?
Investment bank predicts 1100 S&P (news item ).
1. It used to be with the dignified female fundamentalist who issued her forecasts invariably upon very bullish technical occasions like 100 day minimums, that she would come up with some folderol after a huge decline, and pretend that the fundamentals were bullish as she issued her bullish forecast.
But now the bank apparently wishes to panic its customers and have them sell into panics. They predict a 10% decline if no further service revenues are preferred. The reason for their reason to reason that further reasoning at the hill to accept a compromise with reasonable service increases seems unreasonable to this non flexion.
2. Could the "bank" predicting a 10% decline be doing this to curry favor with the flexions and cronies, or do they dare to blind side the base so that they can take the position, or do they already have that position and wish to hype it like the upside down man, or do they really believe a 10% decline is in order?
Russell Sears responds:
Could it be the bankers signal to their masters in central planning what the bankers predict will happen if the central planners most recent proposals are adopted or in this case no new compromise proposal comes to be? Or could this be a second order deception, where they imply to the markets they are against such ill conceived planning, but secretively have already front run the public and hope, as they have been lead to believe by the central planners, that no deficit reduction compromise will be reached.
November 9, 2011 | 3 Comments
Today was a first ever for up, up, and up, and up, reasonably defined. With this 1 or 2% magnitudes. Amazing.
Like a stone wall, the stolid Germans are ready to sacrifice for the good of the over lords + or - at the round number of 6000.
Vince Fulco adds:
Negative news couldn't make a dent for long; does that mean teflon conditions till Thanksgiving? Not likely.
Russ Sears writes:
Pardon the talk of politicians, but the count is two days in a row that prime ministers have announced their resignation and the market moved up.
At this rate one wonders how high the Dow would go if every day a member of Congress would announce their retirement.
How is a 50% Mark Down on the Par/Redemption Value of a Bond NOT a Default?
[Ed.: for background information see for example Greece Default CDS Failure to Trigger ].
Stefan Jovanovich continues:
"You don’t need everyone buying CDS to expect it to pay out, you just need a buyer of last resort who’ll make it pay out. You don’t need tons of short sellers to root out fraud, but you do need to allow short selling so that one or two clever and capitalized short sellers can bet against the frauds. You don’t need all the buyers to think the price is right, just the marginal buyer. Greek CDS “works” only in the limit case, only for a non-bank investor who’s willing to be a jerk and run a certain amount of politico-PR risk. But that doesn’t mean it mostly doesn’t work. It means it entirely works."
From a post by Matt Levine.
At the risk of being the jerk who still doesn't get it, the tape is not the world. The short sellers win because there is, in fact, a fraud - Baldwin-United, Enron, etc. really do not have the money or assets that can produce future profits even though their books say they do. Even without short-selling the fraud would ultimately produce the lovely worthless securities losses that can be deducted against ordinary income. The tape would catch up with the world.
With CDS for sovereign debts it seems that "the world" is what the financial authorities define it to be, not the reality of Greece's solvency. I can understand that people will continue to trade CDS because there is, in fact, a market for them; what I do not understand is why anyone believes "the market" in this case has any reality other than a virtual one.
Gary Rogan comments:
Stefan, there is a real reality that
(a) by itself Greece can't pay off it's debt
(b) there are all kinds of people that want to do something to improve it's ability to pay it off.
In this sense Greece is not Enron and the reality is not virtual. There is this strange technical point of what happens to the CDS's if "everybody" voluntarily accepts a 50% haircut, but even the resolution of this point is real, not virtual, so if you buy both the debt and the CDS's something real will happen if you hold the debt to maturity.
Stefan Jovanovich responds:
There are two problems with this scenario:
(1) everybody will not voluntarily accept the haircut in the CDS market; somebody will want to collect in full from a counter-party because the sovereign debt that is being swapped has done a half-default.
(2) Greece's sovereignty does not guarantee its solvency -someone holding even the new debt to maturity may find themselves receiving less than par. That is the contingency that the hedging instruments were supposed to protect the buyers against.
Gary Rogan writes:
True, but none of this is virtual any more than the currency in circulation is virtual, which is what you seemingly claimed/asked. There is posturing going on, and I'm sure fraud depending on how you look at it, but there is real money involved and those with the best information, and to a lesser degree instincts, are making real money. Can you imagine what a smart European flexion getting the information in real time can do? Sooner or later we are talking about real money.
Stefan Jovanovich writes:
Some of us are old enough to remember the collapse of the commercial paper market around the failure of the Penn-Central. Perhaps the Z-Man and the others who are out there making money while us Social Security recipients are busy typing can answer these really naive questions: how long did it take for the non-financial commercial paper market to revive and did it, in fact, revive? I have no doubt that there is real money involved; there was real money involved in the commercial paper market and then…. it was all gone. Currency is virtual but it has legally-enforceable exchange value.
My naïve question was - and is-what is the legally-enforceable exchange value of a credit default swap if "credit default" never, ever happens. If the insurance company can rewrite the policies, with blessing of the insurance commissioner, the buyers for that insurance may decide to go elsewhere for their risk management. I know there is supposed to be a chair for everyone in the room except the last guy; but the history of markets is that some people stop betting on finding a seat while the music is still playing and "everyone" knows the game will go on forever.
Gary Rogan says:
Does it really matter to anyone not playing if sovereign Credit Default Swaps disappear from the face of the earth? It's an iffy concept in the case of US treasuries anyway. Who will be there to pay if off in the world where the US defaults? It's not like you won't be able to buy earthquake insurance in the East Bay, so put your mind at ease Stefan.
Stefan Jovanovich continues:
I never know when Gary is teasing. Earthquake insurance is no longer offered in California by private insurers because the insurance commissioner allowed homeowners to collect on damages from earth movement - which is a chronic problem in coastal California - even though that risk was specifically excluded from the coverage. As a result you must now buy your insurance from the State of California which, of course, people decline to do - given this sovereign's solvency. As to why it matters, the disappearance of what has been the primary tool for risk hedging may have effects as large as those that came seizing up of the commercial paper market. We owe those once in a generation bargains in 1974 as much to the inability of firms to borrow short-term as we do to Watergate and oil price surge - perhaps more.
Ken Drees comments:
What is the percentage of uninsured homes and businesses in the earthquake probability zones? (guestamate is ok)
I find it ironic that the overdue earthquake area people are living by the dice roll.
Stefan Jovanovich responds:
According to the Insurance Information Network of California, fewer than 12% of the state’s home owners had earthquake insurance last year, and fewer than 10% of businesses had the coverage.
I don't see the irony. Some risks are not worth the cost of insuring. This is one of them.
Russell Sears comments:
Perhaps I too am naive, but I thought this was obvious: If the messenger will not agree with the rues, extend and pretend, then they must be shot. Currency CDS /hedging /insurance contract was sacrificed for the sake of the Euro.
While there may be some value in the litigation options, currency CDS's going forward are a dead market are they not? Just like structured securities, if you cannot trust the contracts for being truthful, (in a practical everyday sense of the word, not legal twist) then they are dead.
Are we willing to live with liquidity of MBS and currencies being at the mercy of those sovereigns that still have some semblance of confidence in them? Can these sovereigns keep these bottomless guarantees "off-balance sheet" without it cracking them? The market seems to be saying for now, "yes".
After what I heard on NPR this morning I would say the Cards are doomed. It appears to me that they are looking for a great excuse in case they lose.
NPR was gleefully reporting a good excuse. It turns out the bull pen did not warm-up the pitcher for the guy that hit the double, like the coach called for because, get this, they did not hear what Coach La Russa said on the phone. Great excuse! That was painful to hear.
Here is the story
Why does this matter?
In the heat of a grueling marathon I've learned that once you are searching for an excuse in case you lose, you sure will.
George Parkanyi writes:
To your point, one of the biggest chokes ever was the Ottawa Senators going down to the Toronto Maple Leafs a few years back. They were leading the series 3-2, and the 6th, clinching, game 1-0 late in the third period. Toronto had been completely shut down to that point. Toronto got one penalty, and right after, another. What a glorious opportunity for Ottawa -a 5 on 3 power play! What did they do?
They didn't even go into the Toronto zone, they passed it around and just generally wasted time to eat up the clock. But there was still about 8 minutes left to go in the game. I still remember jumping off the sofa and literally screaming at the television "What the ^*&&*% are you doing, you idiots!!!!" Sure enough, playing not to lose, they gave up a late goal to an energized Toronto, who then won the game in overtime and also won the 7th game after that.
That game is etched in my mind as the poster-child example of why you don't play not to lose when you're in a competitive situation. I remember this when I play soccer, and never play more conservatively when we have only a 1-2 goal lead no matter what stage of the game. My philosophy is keep doing what got you there. That's also why I absolutely HATE late-game prevent defenses in football.
Peter Saint-Andre comments:
The Wikipedia page about baseball points out the following:
clock-limited sports, games often end with a team that holds the lead
killing the clock rather than competing aggressively against the
opposing team. In contrast, baseball has no clock; a team cannot win
without getting the last batter out and rallies are not constrained by
time. At almost any turn in any baseball game, the most advantageous
strategy is some form of aggressive strategy."
Some form of aggressive strategy is always advisable in investing, too. You can never simply run out the clock.
Stefan Jovanovich writes:
And, for racquet sports, even more so; they are the only hand to hand combat sport where you cannot be saved by the bell or blame the loss on the manager or the rookie who tried to steal second. Speaking of extraordinary sporting events, did anyone see what City did to Manchester United? Remarkable. Lazio's loss is Manchester's gain.
Scott Brooks comments:
This is not completely true of baseball. In little league, most (all) games have a time limit. So there is a strategy to playing to the clock. The home team always got the last at bat (unless they were ahead) after the cut off point.
So if we were the home team and were ahead and the cut off time is approaching, we would make the inning last as long as we could. We'd have our batters run the count up. We'd have them step out of the batters box between pitches. We'd call time out several times, etc.
All to ensure that the opposing team didn't get another at bat. Sure we'd have gotten another at bat after them if they tied the score or got ahead of us….but why take the chance.
Peter Saint-Andre responds:
So is the lesson that little-league investors think they can run out the clock, but big-league investors know they don't have that option?
Scott Brooks writes:
Whatever league you're in……..
……Know the rules and use them to your advantage so you can win. I don't
care what the rules are, just make'em clear and let me play/coach/invest.
As Vince Lombardi said, "The object is to win, to beat the other guy"
There should be a New Yorker cartoon with the gist sort of like the palindrome's trades selling 1000 contracts at the market and then calling up the reporters and saying, "this market seems like it has a very weak bid" or like Thor drinking from the Jotun's cup of mead and making very little progress in emptying it not knowing that the other end was connected to the Atlantic Ocean.
We used to have a very good cartoon about "why sell my company? Things are going very well". In the background was fire engulfing his plant and thunder and lighting and floods ready to engulf. Anyway, we need something like a old lion like the sage saying, "this market seems to be going down for no reason" and a man like the sage or scrooge rubbing his hand in glee in dollars as he siphons off all the profits and humbly speaks at a fund raiser for his favorite politician.
Russ Sears comments:
Or a caption with diplomats/politicians saying "at least we had the sense to avoid a trading war." With money being stuffed into various industries hand behind each countries back.
First we are in a trade war of a different kind. The arguments that tariffs leads to a trading war is well known. 1. It leads to displacement. 2 it is a form of tax on the consumer. 3 It delays production moving to those countries that have a real economic advantage. 4. It leads to retaliation and escalation. 5. The friction can grind economic growth to a halt. But what is the flip side of a tariff, a government subsidy. A government subsidy is a double negative equivalent to a tariff. It is a double negative because: 1 it goes for the favored domestic companies. 2 Its a future tax to domestic tax payers rather than an immediate tax to the foreign importer. The solar company’s bankruptcy makes it clear that each of these arguments against tariffs is occurring in subsidies. Further, it shows how much more crippling this war is in an “idea” or technology economy rather than manufacturing economy because it can be started upfront, before the evolutionary process can naturally occur. How far would applying this lesson go towards restoring some sanity and halting the skid-marks to the current crisis many developed governments find themselves?
And second how fast would the local fog clear if this lesson was applied to the flexions Too Big to Fail companies?
The men's marathon record was broken this week end at the Berlin Marathon, pending ratification, by Patrick Makau with time of 2:03:38. Beating the old record Sept. 2008 record by Haile Gebrselassie by 21 seconds. The record has been broken with some regularity since the mid 1930s when the depression caused men to look for any way to make a living or bolster their reputation to get and keep a job.
It has occurred to me that the record tends to be broken when the economy is in long term trouble and when the young are having hard time finding opportunity elsewhere. The record broken by decade is as follows: 1930, 3; 1940, 1; 1950 6; 1960 9;1970 3; 1980, 5; 1990 2, 2000 4, 2010 1st last weekend. Marathoning is a tough way to make a living and the competition, at least in my time, has appeared to get stronger as the stock market tanks and gets weaker as it is about to take off. I missed my opportunity by not taking up serious marathoning in 1992 but waiting till 1996, 1992 was when I was at my peak and the competition was weakest.
Below is a comma delineated file with the month the record was broken, the % change in the Dow Index 12 months prior (counting month record broke), and the 12 month after % change in Dow index.
Here are some key statistics:
12 month prior avg. 3.22% stdev 13.64% count 34 negative count 15
12 month after avg 13.59% stdev 21.06% count 33 negative count 7
Student T test 2 different stdev one tail, 1.14%
It would appear that the marathon tends to be broke at the turning points in the Dow, however with a wider deviation than prior and the last 2 times this did not work. A similar result occur taking out all but the first occurrence when the record is broke within 12 months of the last time, except the student T test is higher due to fewer occurrences.
Month Record Broke,Prior 12 month % change in Dow,Next 12 month % change in Dow, New Record
9/1/2011 -0.15%, ?, 2:03:38
Kim Zussman queries:
Russ, in your opinion, will the 2 hour mark be broken in our lifetime (you and I are about the same age)?
The 12 records since 1980 have dropped in a roughly linear fashion, which if continued extrapolates to about 2035
Russ Sears replies:
If you would have asked me in the 90s about this, I would have said no way, they are beginning to form an asymptote. However, I believe sport science has made considerable progress in 2 areas critical to lowering this record below 2 hours.
1. There is a much better understanding of the altitude effect has in endurance training and how to maximize this effect.
2. There are now much more creative ways to exercise more with less detrimental stress but maintaining the positive stress and exercise specifics. See zero gravity treadmills and water running treadmills for example.
And perhaps it simply is competition creates its own opportunity and it is clear to me we are in a new competitive era for distance running.
Hopefully it will continue for the rest of our lives. But not because the economy will continue to flounder. Especially for the young, ambitious and talented.
Larry Williams comments:
The math is all a runner has to do is knock 8 seconds a mile of his/her pace. Much easier said than done, but it's a goal within reach. 2:00:00 will be broken in next 10 years is my forecast. Mostly because of what Russ said–better training habits and knowledge. With science, a runner with lots of personal angst will break through. Must have personal angst (see current frank shorter article in Runners World) to get through the pain.
September 16, 2011 | 5 Comments
Those rogues can't be stamped out when they lose: "Rogue Trader At UBS Loses $2bn " .
Russ Sears writes:
Could these problems with rogue traders at too big to fail institutions be the case of misinterpreting the example of leadership. Like the bribe taking cop's son getting busted for theft or the philandering preacher's boy getting the deacon's daughter pregnant. Corruption without some good protection is unforgivable!
Jim Lackey writes:
It's always a tech guy that can hack around the internal risk controls. It's easy to catch a trader in trouble if the managers actually talk to traders. The kid went on tilt and blew it up. Let me guess long the Dax hoping for a bailout. I always laugh at rogue or unauthorized. That is code for throw the new kid under the bus. Fact is no one was watching him.
When I was the new kid we had this happen. A tech guy wanted to be a trader. They gave him the usual line for trainees of 200 shares and no more than 5 positions. Weeks later he had 100,000 shares short of a Broadcom.com type stock right as the launch in 99.
It was the final nail in coffins at that bucket shop. Lessons learned, but weeks earlier I protested the clearing firm change from S to P. I loved clearing thru S and by then it was G. I was promised much cheaper clearing costs and for a day trader , man was it much cheaper… Of course the get the joke lessons learned was the firm was undercapitalized which is not the big deal. They were not smart. You can tell if traders or risk managers are smart on how they exit bad trades. They were obviously not, so the S risk manager boots the firm.
(edited for color but this is the gist of how it goes down) The street is small… "watch out for those guys". p calls late at night..hey what's up with the 100k short 5 against you… Instead of doing the correct thing and saying oh that is fine its a hedge on options position and we will get that trade cross first thing tomorrow…. they said OM gauche! what that isnt ours! Oh yes it is! Oh My thats a 500k loss no trader has a limit higher than 100k loss in a day.. that is not possible! Oh yes it is and dont worry it will be 1.5 million by the open. (no disaster plan)
By the next AM I have friends calling from other firms asking who is the moron that told everyone that NY guy is caught short 100k lot and he's a 200 share trader.. I said I dunno they didnt call me or Id be long with you on this huge gap up as the broker covers all at the open at the market.
We all pulled out money and quit the next day. A week later the firm was up for sale. No one bought it. A month later they were gone. and if the banks didnt have a line to treasury and feds this is how all of these disasters would go down. It's much like the 19th century system.
Not to say that the bank today with their 2 billion in losses should go. Yet I have 5 stocks on my screen right now that under normal trading conditions would be gone 3 years ago.. and we would all be uh better off.
Now you know who sold the Dax under 5,000, 10% ago. lack
A former Oklahoma banker and I agreed at lunch that:
1. The statement from Buffet about BoA and the bathtub is bizarre.
2. Does not play well here in the Bible belt, so don't blame us country folk.
3. Was a picture we could do without on a down day.
4. Was intended to parallel the supposed old timer's squeaky clean conservativeness. Implying he is willing to stake his reputation on them not being dirty as everybody is saying, since he just cleaned-up.
August 24, 2011 | Leave a Comment
There is a paper making the rounds from the FRBSF that looks at the predictive relationship between "middle" savers (40-49) and "old" spenders (60-69) for equity market P/E ratios. The paper demonstrates a relationship between the M/O ratio and historical market P/E ratios from 1954-2010. The paper is a quick read.
The conclusion that is getting the attention reads:
Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. A key demographic trend is the aging of the baby boom generation. As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades.
A couple of quick points on the FRBSF economic letter:
1) The key paragraphs in terms of stock implications are:
Since we have forecast a path for the P/E ratio, predicting stock prices is straightforward if we can project earnings, the E part of the ratio. For this purpose, we assume that, in the next decade, real earnings will grow steadily at the same average 3.42% annual rate by which they grew from 1954 to 2010. To obtain real earnings, we deflate nominal earnings by the consumer price index.
The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021, cumulatively declining about 13% relative to 2010. The subsequent recovery is quite slow. Indeed, real stock prices are not expected to return to their 2010 level until 2027. On the brighter side, as the M/O ratio rebounds in 2025, we should expect a strong stock price recovery. By 2030, our calculations suggest that the real value of equities will be about 20% higher than in 2010.
Note that they are using "real" stock prices. Converting this to nominal using currently depressed inflation expectations of 2.01% over the next decade (from TIP breakevens) implies an increase in stock prices that is roughly 50% higher than what is priced into long-term S&P options. If they are right (and I think they are wrong), then the returns to equities using long-term options should be around 3.7% over the next decade (better than government bonds) while the returns to holding the S&P should be roughly the same 3.65% due to dividends received over the next decade.
They are also making an assumption that trend earnings growth mimics that of 1954-2010. They are calculating this using a straight line two point growth. Fortunately, they ignore that 1954 earnings were roughly 50% above long-term trend lines while 2010 earnings are roughly 30% below trend. Using an actual trend line (rather than point to point) growth would imply that S&P earnings should grow 10% per year over the next decade (this makes more sense if you forget about "peak margin" nonsense and recognize the current profit levels are against a very depressed economic output line). Using their other data (dubious for reasons articulated above and below) and trend earnings would imply the S&P should rise roughly 83% over the next decade (to ~2,100). This would yield returns from long-term options of 22.3% per year over the next decade while holders of the S&P should receive returns of 8.1% per year.
2) They "fit" data from 1954 to 2010. There is a reason for this choice of data sets — it's the only one that works. The demographic data offers zero explanatory power for periods prior to 1954 for one very simple reason — the proportion of the population that was aged 60-69 (their "old" people who are supposedly liquidating assets) was far, far lower. This would imply that P/E ratios should have been stratospheric in the pre-1954 period. We can see a tease of this in their chart that shows rising P/E ratios from 1964-1954 on their "model generated" line. Pre-1954, this model generated P/E would have risen dramatically. In contrast, they were depressed. As a result, I would strongly question whether we can generate any real insights on the forward direction of P/E ratios from this analysis.
The reality of all this nonsense is that when equity markets are low and falling, most people will offer explanations for why they are low and falling. Those arguments will sound intelligent until equity prices begin rising inexplicably. Then they will rage against the "bubble" until they suddenly see the light and argue we are at a permanently higher plateau.
Kim Zussman writes:
This is a variant of the "sell to whom" question posed by Jeremy Siegel in "Stocks for the Long Run". ie, when boomers retire and they change from saving to consumption, who will buy their stocks?
Siegel's suggestion was younger people of developing nations / emerging markets. Given the known tendency for people to invest closer to home, why wouldn't up and coming Indians and Chinese buy domestic vehicles rather than SPY?
Jason Ruspini writes:
Whatever problems we think we see with such studies, it is an embarrassment for economics that the effects of demographics, globalization, and diffusion of technologies are not more widely studied and understood. This provides cover for all sorts of claims like "tax rates were higher in 1950 and 1990 and we had excellent growth then…"
Russ Sears adds:
While I agree that studying the effects of the predictable real economy on the real economy should get more study. Further I agree with your implication, that jumping from fiscal/monetary policy to real economy often hides a large amount of nonsense. However, I can not encourage a tunneled vision approach of narrow real effect to narrow real effect. Especially when I see the design of the study to be such that its intent is to keep people from following their natural ambitions and make sure the individual is smaller than he needs to be by discouraging investing in capitalism. They (the govt) only do these studies when this is the case. The nonsense comes by narrowing the line of vision to reach the conclusion that we need them to protect us from ourselves.
Jason Ruspini replies:
This sort of criticism was behind some of the controversy with Tyler's Cowen's book. To those on the right it sounded dangerously like " 'We' should do something! " To those on the left, " 'We' are poor and can't do anything…"
But I don't see why low average rates of return should discourage entrepreneurs. Situations like Apple and Facebook suggest that where there is growth in a low growth environment, money funnels to the innovators just the same if not more vigorously. Regarding Facebook, my sense is that part of the "problem" with current technologies as compared to those of the 19th-20th century is that the latter often compressed time in terms of more efficient communication, travel and production while the former largely serves to fill time with questionable effects on production and average asset returns. Additionally, the diffusion of the latter 20th century type across the world is now past its inflection point.
One other point..
Japan in the '80s through present might be a better complement to the Fed study than the pre-1950s world as suggested in Mr. Green's original email. Equity returns aside, all things equal, more retirees should translate to lower rates. Given sovereign debt, I guess one should say lower real rates.
Russ Sears responds:
The government is in competition with the private sector for capital…In the fiscal world should the retiriees give their capital to Government and let them continue to spend or should they give it to entrepreneuars and let them spend it.
In either case fewer real world projects will begin to those who loss the competition for capital. All things being equal if less money goes to the stock market, few projects are begun and cost of captial is raised. If they cannot get capital from issuing stock, they must issue more debt, real cost of borrowing goes up.
But if real demand for private sector goods are raised and fewer project in the private sector were funded, cost of loans will go up and the profits per $ in the stock market would also increase.
If more money goes to government, the more our government becomes addicted to the low cost of capital, and the more it spends on less and less productive projects.
Am I missing something?
Which do you think will raise the overall wealth the most? Would you believe a government study suggesting investing in the private sector is doomed to low real returns for decades?
Let me try a different format for the "surprise vol" days:
With so few "starts" of volatile periods fairly balance outcomes and over so much time nothing too hang a hat on. Unless that is the lesson.
Inter Day Vol Count Positives Average
>2.75% 6 1 -2.55%
>3.00% 11 1 -2.54%
>3.25% 10 1 -2.67%
>3.50% 10 2 -1.71%
Inter Day Vol Positives Average
>2.75% 2 -0.47%
>3.00% 5 -0.13%
>3.25% 3 -0.40%
>3.50% 5 0.19%
Next 63 Days
Inter Day Vol Positives Average
>2.75% 4 0.97%
>3.00% 5 -4.06%
>3.25% 4 -3.64%
>3.50% 6 -1.01%
August 4, 2011 | 1 Comment
I don't think football is good for life expectancy. I believe it killed my father. It shook up all the muscles as well as the broken nose 17 times (no helmet visas) in those days, and that sent a signal to the body to do him in at 64.
Russ Sears writes:
While there is some merit to what the chair is implying about being hit so many times. The bigger issue for most people is the weight lifting and with it the weight gain. Most high schoolers do not have a clue the bargain they have made by bulking up at that young age. It is very much like a high school kid taking a 30 year mortgage on a McMansion. Yes, some of them will enjoy both the lifting and cardio enough to be able to afford the time commitment it takes to maintain a healthy buff body all their life… but most after bulking up have trained their adult body to be a certain weight. This weight is only healthy if it is muscle weight, but most will not be able to maintain the muscle and revert to fat or left with a life long battle of combating weight gain. Cardio health will kill and debilitate many more before there time.
While I don't have the number handy, I believe the actuarial stats will show this for all levels of football.
For a 1 year period the S&P is up about 15%, while the KBE (market cap bank ETF) is down about 7% and GS is down more than 10%
"Men enslave themselves, forging the chains link by link, usually by demanding protection as a group. When business men ask for government credit, they surrender control of their business." Isabel Paterson, “The God of the Machine”
Perhaps the markets have recognized the too big to fail investment bank have become little more than union shops…running and existing not for the stockholder/owners but for the employees and the politicians. Government can print more and more money, but if the sole idea of the bank is to continue to exist not to take risk unless it help politicians; then the money printed will continue to only flow to the flexions The government control what business risks can be taken and the answer so far has been “None, we only want guarantees, banks cannot fail”. The circularity of the “what risks should the too big to fail be allowed to take?” question escapes them.
There are several reasons that cynics are on the rise in my opinion.
1. People assume the cynic is the expert. The cynic has an aura of authority.
2. Cynicism is masked as realism.
3. People assume the cynic is a healthy skeptic. On first encounter these two are hard to distinguish.
4. The cynic guards against disappointment.
5. The cynic creates an “us” against “them” world. "We won't be fooled again" by "them".
6. It is easier to find a problem than create a solution or even understand how complex creativity works.
7. It is easy to ignore the positive. Hard to ignore the negative.
8. People assume their bias is only one sided: When they like something too much. People recognize their biases when there is favoritism but justify their biases when there is disdain or prejudice. The cynic reinforces that their biases are the only morally defensible ones.
9. The cynic has many times when he is proven wrong, but it is often hard to pinpoint the opportunity cost to that cynicism (for ex. the profit he missed by staying out). However, when he is proven right, it is very easy to see how much he has saved.
10. The belief that Type II errors or believing falsely in a person are much more damaging than Type I errors or not giving a good person a chance. Despite the time it takes for a person to prove she is proficient and the moment it takes to lose trust-worthiness.
11. The cynic is elevated as “your own man” by the media and politically. Thus becoming the “go to person” when they want something said or done. This creates all sort of side agreements and quid quo pro understandings. Every TV program needs the phone numbers of a few favorite cynics.
12. Ironically, the person most likely to publicly be called down for their cynical tendencies is the person that is cynical towards the celebrated cynic.
Con-artists understand deeply the appeal of cynicism and use it against their prey.
The cynic is the ultimate champion for the status quo. The cynic can define people by their weaknesses not their strengths. Since everybody has weaknesses, they can dictate who is important by defining who is not important. Old man’s disease is giving in to the appeal of cynicism.
Rocky Humbert writes:
"A cynic is a man who, when he smells flowers, looks around for a coffin."
H. L. Mencken
In the spirit of not being a cynic, I note today's news story reporting that volunteers in Japan are being asked to grow sunflowers to produce seeds … so even more sunflowers can be grown in areas contaminated by radioactivity from the Fukushima disaster. The proponents say sunflowers can efficiently absorb radioactivity from the soil in a process known as phytoremediation. Here's the news story.
The skeptic (as opposed to cynic) in me thought that this sounds like an example of "green" people confusing Flower Power with nuclear physics. But a little bit of research reveals a bit of "sunny" science for the weekend. There is REAL science here! Sunflowers (and certain other plants) CAN decontaminate radioactive soil faster and cheaper than many other approaches. Chernobyl was a large-scale proof of concept. Here are 2 of academic papers on the subject:"Screening of plant species for comparative uptake abilities of radioactive Co, Rb, Sr and Cs from Soil,"Gouthu et al ; Journal of Radioanalytical & Nuclear Chemistry" and "Uranium Absorption Ability of Sunflower, Veiver and Puple Guinea Grass," Roongtanakiat et al (2010)
SO THE MORAL OF THE STORY IS: "A cynic is a man who, when he smells flowers, looks around for radioactive contamination."
Pitt T. Maner III comments:
The phytoremediation and bioremediation fields have bloomed to aid companies tasked with difficult cleanups. Even earthworms can be useful with certain contaminants (PCBs).
Larger trees also can be used to influence the flow of impacted groundwater so that contaminants do not move offsite—effectively they act as small pumps (think of all the Florida maleleucas used to drain wetlands, now designated as "noxious weeds"). Trees can help with the treatment process through the uptake and concentration of contaminants or the breakdown of contaminants in the bacteriologically-rich portions of the root system .
The economics can be interesting and one can only imagine what they are in the Japanese case and how they affect current land values. Those with an understanding of the actual risks involved and the ability to cost effectively clean properties have in certain instances done well:
"Acquisition, adaptive re-use, and disposal of a brownfield site requires advanced and specialized appraisal analysis techniques. For example, the highest and best use of the brownfield site may be affected by the contamination, both pre- and post-remediation. Additionally, the value should take into account residual stigma and potential for third-party liability. Normal appraisal techniques frequently fail, and appraisers must rely on more advanced techniques, such as contingent valuation, case studies, or statistical analyses. Nonetheless, a University of Delaware study has suggested a 17.5:1 return on dollars invested on brownfield redevelopment."
Kevin Depew writes:
Why do you believe cynicism is on the rise? In my opinion, the < 35 generation doesn't really understand it or ignores it. I don't have access to it now, but I saw some large scale polling data on Friday that was remarkable in the cross section spreads between < 35 and those over, especially > 65. The gist, based on this polling data, is that if one is > 65, one is likely to find the country going to hell, the economy going to hell, that politicians are evil and stupid and that all bankers and finance people are crooks by a wide, wide margin over younger subset. If interested I'll forward data when I get back in office Monday. I was looking at it in the first place because there is a wide divergence between consumer comfort and confidence data vs market that is outside of 25 year norms and was just curious about the asymmetry in both economy and the polling data.
Victor Niederhoffer writes:
Artie wrote a book on cynicism in the police force that attributed cynicism as a variant of the authoritarian personality. He believed that police became cynical because they saw so much evil that their own persona looked relatively good compared to all the evil, and their cynicism and corruption was a natural outgrowth of the impossibilities of fulfilling all the requirements of an all too demanding job with conflicting goals. I believe we become cynical on the list because we see such ephemeral behavior by the public and funds, and such inside maneuvering by the cronies and flexions. It's hard to maintain a proper chivalrous attitude when confronted by these things day after day.
Jeff Watson adds:
But that cynicism, if allowed to fester, will have profound effects on one's trading. I've seen it happen too many times to people and they end up losing their edge.
Ken Drees writes:
Cynicism towards markets and politicians is healthy, but toward general mankind or society, probably not so well placed since hope and belief in goodness of the total gives one an overall positive tendency towards world view but also a well placed skepticism at certain segments.
The idea of erosion is interesting where the rigors of the job or the constant focus on conflicting outcomes that collide with the overarching worldview wear down the person's belief in good. One thought along these lines that I have is that by the end of one's life you are so distilled down in terms of your true character that its impossible to change. You are either that positive and generally nice old person, or a frown wearing old crank; the thoughtful scientist who never stops learning, or a worn out 24/7 TV watcher.
Russ Sears adds:
I believe it also has to do with the narrow vision we have of public versus personal life of the cynic. We do not see that like a partying narcotic addict, the soul has been sold for a very narrow gain. The personal life is full of turmoil and eventually rots the productivity out of the person. Think about the cynicism required of the steroid user or EPO user for example.
I believe that many companies demise starts when a new "C" position arrives within it- the Chief Cynic. If not confronted as Artie did, often this position is allowed to become an all consuming cultural force.
Vincent Andres adds:
"the cheaper money tends to drive out the dearer"
(the money of lower value drives out the money of higher value)
(« la mauvaise monnaie chasse la bonne » )
As specs we snicker at the lottery player, he is a sucker. We smile when we hear how the crowd is routing for the hometown favorite when we know odds favor the other side. We hopefully carry out the canes when the crowd is tossing down the tickets in disgust, we sniff for value when there is no value there–so says the financial press.
But what is our own attachment to this concept–catching a falling knife, holding a loser, getting involved in some fiasco stock since the market is beginning to bore, riding a coattail that turns into a skid, throwing in "just this once"? Why do we fail to follow our own good sense from time to time?
There must be a thrill or an ego impulse underneath this temptation to turn from the path and into the wind of long odds–"cause we can handle it".
Victor Niederhoffer writes:
Our own attachment should be based on quasi scientific study., not riding a coattail.
Ken Drees writes:
True, but do we fasten our own rickety reasons from study based on the past which has no real reason to work in the future other than past frequency, tendency and relationship, and thus delude ourselves into thinking that our proof more than compensates for the new speculation? And if finding tendency and causality can be negated by the speculative theme of ever-changing cycles, and also trumped by the unknowns –how do we believe this and thus risk capitol?
I think that the chair has outlined many great themes in speculation, almost like laws:
1. Methods must be tested in order to find relationships of validation.
2. The laws of ever changing cycles are present in the market at critical-mass moments.
3. There is a high degree of relationship between markets and natural systems. What can be said of the "unknown"? What is this speculative doomer, the whispy apparition above the pond at days end? What law can be attributed to this unknown force that seemingly has uncanny timing?
Ralph Vince writes:
I think it's simpler than that.
-The past gives us a proxy for the distribution of what can happen.
-We can amend that distribution of what can happen based on how we foresee the future diverging from the past
-That very distribution can now be used to determine how aggressive we might want to be withing a given risk (drawdown) constraint.
-If we don't exceed that drawdown constraint, and our distribution is reasonable of the future, the profits accrue.
Gibbons Burke writes:
I wrote this in a previous thread about the difference between speculators and gamblers, and I think it holds true: "Gamblers are willing losers who occasionally win; speculators are willing winners who occasionally lose."
At bottom, and at one time or another, most of us are gamblers. It takes a very disciplined, brilliant, and perhaps unrealistic person to only play games where the odds are in our favor. The reasons many engage in knowingly losing propositions are greater than the stars in the night sky in rural flyover territories. Entertainment and division rank high among them, sociability, peer pressure, guilt about the money they are risking (unconsciously disposing of it), fear of success, self-disgust, compulsive addiction to the stimulus-response loop, adrenalin junkie.
But all these are all proxies for the thing everyone is really seeking, usually unconsciously: a desire to be in union with the godhead, the creator, the divine purpose. As St. Augustine wrote in the opening lines of his autobiographical "Confessions": "You made us for thee, Lord, and our hearts will be restless until we rest in thee."
Phil McDonnell writes:
When I ask people why they do not invest in a guaranteed savings account or short term t-bills they usually respond that they are too boring. And they are, or at least used be because they could not lose. Most traders unconsciously seek to lose because it represents action and excitement. While I think the usual arguments that it takes assumption of risk to increase return have validity, at the sub-conscious level the desire is really no more complex than risk seeking for excitement.
Ralph Vince writes:
I agree — this is what frightens me about individuals who are out investing their own money — no kid needs to relive the station wagon as home for awhile as a consequence of Dad's gambling proclivities.
I'm beginning to think institutions are just the individual lambs in the wolves clothing of trading with other's money.And the reason I say this is because, again, not only can they not articulate their criteria for being involved in this, most criteria involve the ultimate metric of "what is the probability of getting smacked x% in the coming y period(s)."
And I don't see ANY of them operating that way. Rather, their risk metrics are ones that don't really tell them anything, analgesic salves that do not stave off the infection.
Russ Sears writes:
Personally, my record shows that I am more often guilty of trying to catch the falling knife on an individual stock and on an option trade, than I am on an allocation strateging or long term market timing basis. I believe this is because of two reasons, One reason is I am just to gullible for a single stock, and buy the story the more it goes down the more I am convinced it will pop, often averaging down. I believe most businesses as a whole are running honorable businesses, that is they are trying to do what is best for the long term. However, the exceptions happen and there are frauds/crooks and businesses that have agency problems (businesses run for the executives or employees short term interest) The second is that I am often guilty of believing that the studies timing is much more stable than it actually is. It may be that the market is over sold and will bounce back, this results is the crux of my "edge, but the time period is often part of the ever changing cycle.
I have helped this some by giving myself some boundaries or a do not buy or sell if held rules of:
1. If the market believes the board or leadership is not acting in the stockholders interest, based on key decisions they have made.
2. If there are union grievances making the press.
3. If there are rumors of fraud or accounting problems.On options buying time or gamma seems to work better. And in general I have learned to not do as many option trades as I am not as good at them as I think I am.
These rules are simply my adjustments for my own shortcomings.
Jim Sogi writes:
The heuristic at work here is risk aversion where one would rather face a known small risk with bad odds of a big win, rather than a 51% favored odds with a risk of a large loss. It's very hard to overcome the natural tendencies.
Here is an article that describes a study of percentage of pro athletes from small towns.
However, from practical experience might I suggest that small town effect also comes from the proximity of practice. The fields, schools and coaches are close to the child. Think of the ease in small towns for a kid to hop on his or her bike and make it to practice or simply go to the park where other aquaintances can be found to join a game. It would seem that hover parenting gets a big boost by soccer Mom's having to attend every practice as the taxi.
And as an adult my running time was possible because of a 5 minute commute to work.
I think it says something that China's best marathon record time ranks it 24th out of countries and India's best time is 2:12:00 rank it the 60th fastest country.
USA is 3rd in population but 4th best marathon time.
These two country's populations dwarf the rest, with these 2 added into the top 60 countries by time there is 0 correlation. Without them there is R sq of 20%
I believe this has more to do with the size of government than it does with the population size. To have 4 times the population of the USA, how many times must the individual be squashed to keep order.
I have heard that you have a better chance becoming a pro ball player when you are from a small community than when you are from a big city. I don't know if this is true. Would like to see the stats. However looking over the data for marathoners it looks like you have a better chance of being world contender if the population is less than 100 million.
I was reading about the famous double slit experiment and then thinking about the Heisenberg uncertainty principle, the math, and the observer effect. I wonder what types(if any) of market implications could be attributed to the observer effect.
Ken Drees writes:
Interesting. I was contemplating this more than a few weeks ago too, but let it drop. It made me think of Schrodinger's Cat:
Schrödinger's cat is a thought experiment, usually described as a paradox, that Austrian physicist Erwin Schrödinger devised in 1935. It illustrates what he saw as the problem of the Copenhagen interpretation of quantum mechanics applied to everyday objects. The thought experiment presents a cat that might be alive or dead, depending on an earlier random event. In the course of developing this experiment, he coined the term Verschränkung (entanglement).
I was considering how a trade is alive and real only when one puts it on or opens the box and everything else is meaningless– the counting, the theory, the expected outcome– all meaningless unless you commit and then make it real and apart of consciousness, reality, an entity.
Michael Cohn adds:
Schrodinger's kitten's also interesting as a thought experiment across space and time. What I recently learned about the uncertainty principle was that there is a different way to think about it. I always thought about it in terms of how the observer may be creating the uncertainty in measuring both mass and acceleration with the instruments. What I now understand is because of quantum uncertainty these particles actually don't really know exactly where they precisely are at a given point in time beyond a prob distribution so if they don't know where they are I certainly can't help them as much as I would likes to be able to do so…
Jim Sogi comments:
2 closing related issues:
There's the insidious cursor and key watcher viruses.
Another related aspect is the inadvisable practice of putting your cursor over the execute button onscreen and having it execute without having touched the mouse, or accidentally touching the mouse or keyboard at the wrong time triggering the trade. Been there, done that.
There is also the issue of order field depth, which is a form of "disclosed" watching, and other order related manipulation issues perhaps posing, perhaps honest bid, perhaps flow bashing or bandwidth hogging, flashing. Lack surely can speak to many of these techniques he sees in individual stocks.
Russ Sears adds:
If risk is defined as what is not known in the future that if it happens would hurt you, than imagination of what could happen causes you to avoid and prevent that perception.
Done to extremes this creates new risks from the over abundance of care and lack of focus on any other risks even to the point of altering the minds ability to cope. Think interest rate duration management and the creation of the tranches in the securitization process and modeling of those securities. Done in mass this creates bubbles, hysteria, or pop-stars. ( I believe this is the "Lady Gaga" "Apple" link. It is not mysticism but the creation of popular mystic.)
Much of psychology is the study of how unrealistic risk perception creates a difficult life and alters their reality for the fearful and anxious. Why should the markets be immune?
Ken Drees comments:
Lady Gaga is to Apple as Amy Winehouse is to Rimm.
For SPY from 2000 on here is the count of "inside" and Outside days, if inside day is defined as High < prior day High and Low > prior day low. Likewise outside day is High > prior day high and Low is < prior day low.
It would appear that the inside days do not like to occur in middle of week. While outside days like to occur in the middle. But Mondays do not have many occurances of outside days.
Jim Sogi comments:
I have always loved a good library. And some of my happiest days have been spent wandering the stacks of the Widener Library and Baker Library at Harvard, the University of Chicago Library and the University of California, Berkeley libraries. Indeed it was a visit to Lamont library which contained old volumes of the Monthly Weather Review with the great article on runs in sunny days that started me on my hopeful but sometimes fruitless quest to uncover regularities. I never know what I am going to discover in the stacks, and going through the books on a subject as opposed to looking through an index catalogue opens up new worlds, and horizons and puts me in touch with the greatest things that people have ever thought and written.
On one of these forays, exactly 50 years ago I discovered the Fitch sheets that contained every transaction on the NYSE and ASE. I discovered evidence of microscopic reversal and macrospopic momentum and systematized it, and I believe this was the first of one of the first microstructure of markets studies.
Subsequently when I was still in the orbit of the palindrome, we would frequently meet a common friend as we entered the tennis courts or a gathering and they would out of a attempt to harmonize with the palindrome, "what are you doing these days. Same old thing?" and before I could say "yes" the palindrome would always say "yes, unfortunately".
I often think he's right and that over the last 50 years, I have not discovered much new. And yet, here are 10 things I have discovered since then that are simple but I believe have wings.
1. There are always interactions between markets but they are always changing. Witness the bond stock relation and our colored chart on the site.
2. After a regularity has been doing well, it tends to do badly and after it does badly, it does well. This is a variant of the principle of every changing cycles.
3. The interrelations are always different on different days of the week, weeks of the month, months of the year, hours of the day and minutes of the hour.
4. The market likes to force the flexions to take actions that will be in the interests of the top feeders and cronies in the market.
5. After pessimism is at a high level it is good to take out the canes.
6. Inactive markets like islands in the Ocean have a completely different microstructure than active markets. and as activity in a market change,the microstructure changes. Never try to make money in an inactive market or as I say, "never play poker with a man named Doc".
7. The markets have strong regularities but they have as much non-random tendency to do the unusual, so no matter how much a regularity appears, one must manage his money properly to take account of the unusual.
8. There is an upward drift to stock markets to compensate for the return that entrepreneurs need on their money. The higher the necessary compensation, the greater the return.
9. Most technical analysis which is based on shibboleths and seasonality is only good if you are going to reverse it and take account of the vagarious prices that emerge when transactions engendered by such pseudo things are filled by the strong.
10. A major purpose of markets is to transfer resources from the weak to the strong, so that the infrastructure can be augments and stabilized, and everything you read or hear about the market is designed by an invisible evil hand to put you on the wrong foot so that you will contribute and lose more than you have any civilized personage has any right to do.
I've got a few others up my sleeve but I'd like to hear your ideas on this.
Craig Mee writes:
Regarding point # 6, I think, Victor, there may be a medium hand in this, and that markets under modest growth and less speculation may show greater structure relative to their more highly prized counterparts.
No doubt the role of harmony is present in all markets to varied agrees, and the players, although they may variate size from time to time in their chosen poisen, are fairly consistent throughout.
Russ Sears writes:
1. There is a rational often sophisticated explanation for every bubble or to paraphrase Proverbs, "there is a way that seem right unto the market, but the end thereof leads to death."
2. A corollary: to be really sophisticated you must accept some form of willful blindness. Most people will learn to ignore those blind spots. They are blinded by the light. Those that understand where the blind spots are will stuff all the risk into those spots. Then short those blinded.
In the stacks of a library one may come upon a book that one would never have thought to look for in the card catalog– like at a garage sale, how you never know what treasure you will find. Same thing with newspapers, when you open them and scan the ads and story headers, you may read something that you would never had googled. Really there is something to be said for this type of information interaction that will be lost for a time…until it becomes the new thing to do.— keep looking »
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